FOREIGN STOCKS LEAD THE U.S. LOWER -- EMERGING MARKETS FALL THE HARDEST -- FALLING COMMODITY PRICES WEIGH ON CANADIAN STOCKS -- WEAK ENERGY SHARES LEAD OIL LOWER AS MOST COMMODITIES WEAKEN
FOREIGN STOCKS SHOW NEW WEAKNESS... The global stock market rally is running into trouble. That can be seen more clearly in foreign markets. Chart 1 shows MSCI EAFE iShares (EFA) falling below its 50-day average after backing off from overhead resistance formed last June. Its daily MACD lines (top of chart) peaked in early March and have been dropping since then. That negative divergence is a warning sign. [EAFE includes developed stocks in Europe Australasia and the Far East, but not Canada. More on that shortly]. A lot of today's foreign selling is coming from Europe. Increasing Greek tensions may be hurting the eurozone. It's not a good sign for U.S. stocks when foreign developed stocks are dropping. Emerging markets are doing even worse.
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Chart 1
EMERGING MARKETS ISHARES FALL BELOW 200-DAY LINE... Chart 2 shows MSCI Emerging Markets iShares (EEM) falling below its 200-day moving average to the lowest level in two months. It has also fallen back below its February/March peaks, which is another negative sign. The EEM rally fell short of its September peak as shown by the falling trendline. That's another global negative divergence. In my view, emerging markets are being hit on two fronts. One is the recent surge in global bond yields, which usually pulls money out of higher-yielding (and riskier) developing markets. The other is the recent drop in commodity prices. Two of the hardest hit EEM markets are Brazil and Russia (both of which are commodity and energy exporters). Even the Chinese market is showing some weakness. Since global markets are normally positively correlated, it's better for the U.S. when foreign stocks are rising. It's more dangerous when they're falling -- as they're doing now.
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Chart 2
CANADIAN STOCKS WEAKEN ... Chart 3 shows the Toronto Composite Index ($TSX) forming "lower peaks" since April and threatening its 200-day moving average. Weaker commodity prices have a negative impact on commodity exporters, which includes Canada. The green line shows the Canadian Dollar weakening during May after a spring bounce. Weakness in the "loonie" relative to the U.S. dollar is usually associated with weak commodity prices. Add Canadian stocks to the list of weaker foreign markets, which are weighing on the U.S. [Australian stocks and the Aussie Dollar are also being hurt by falling commodities].
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Chart 3
COMMODITY PRICES WEAKEN... In today's weak stock market, the two worst performers are basic materials and energy. That's because commodity prices are falling. Chart 4 shows the Energy Sector SPDR (XLE) falling to a new two month low, and trading well below its 50-day average. I recently suggested that weak energy stocks hinted at weaker oil prices. The dotted line shows the price of crude oil rolling over to the downside, along with most other commodities. Chart 5 shows the DB Commodities ETF (DBC) falling back below its 50-day line. Weakness in commodity producers is weighing on the rest of the U.S. stock market. Copper stocks are also being sold as copper prices fall. Chart 6 shows the Global X Copper Miners ETF falling back below its 50-day average.
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Chart 4
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Chart 5
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Chart 6
DOW AND S&P 500 SLIP BELOW 50-DAY LINES... Foreign stock selling has spilled over to the U.S market which is under pressure. Chart 7 shows the Dow Jones Industrial Average falling below its 50-day line. My weekend message pointed out the "negative divergence" between the Dow and its falling MACD lines (top of chart) which increased the likelihood of a market pullback. It also suggested a possible drop by the Dow to its 200-day moving average. Chart 8 shows the S&P 500 also slipping below its 50-day line. Its red 14-day RSI line has also been diverging from the SPX, and has fallen to the lowest level since March. That's another sign of the market losing upside momentum. The surge in global bond yields to a new 2015 high may be weighing on global stocks. So are increased tensions in Greece as a Friday deadline draws near.
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Chart 7
