GLOBAL STOCKS REMAIN UNDER PRESSURE -- EAFE ISHARES DROP BELOW 200-DAY AVERAGE -- EMERGING MARKET ISHARES FALL TO TWO YEAR LOWS -- NYSE COMPOSITE INDEX STILL LOOKS BEARISH -- SO DO MARKET BREADTH FIGURES
EAFE ISHARES FALL BELOW 200-DAY AVERAGE... The trend in global stocks continues to weaken. As usually happens sooner or later, weakness in foreign markets is starting to weigh more heavily on the U.S. Chart 1 shows EAFE iShares (EFA) falling below its 200-day today for the first time since early July. [The EAFE includes developed market stocks in Europe Australasia and the Far East]. Most of today's selling is coming from Europe and Japan. Notice also that the May peak in the EAFE stopped right at its June 2014 peak. That was an early sign that the rally in foreign developed stocks was stalling. Emerging market stocks look much worse.
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Chart 1
EMERGING MARKETS ISHARES FALL TO TWO-YEAR LOW... My last message on July 30 showed Emerging Markets iShares (EEM) threatening chart support formed late last year. Chart 2 shows the EEM having since fallen to the lowest level in two years. That's the most bearish signal in four years. That earlier message also shows emerging market currencies leading EM stocks lower. The green line on top of Chart 2 shows the Wisdom Tree Dreyfus Emerging Currency Fund (CEW) having fallen to the lowest level in five years. There's usually a positive correlation between the two. [The CEW includes 11 EM currencies in Brazil, Chile, Mexico, South Africa, Israel, Poland, Turkey, China, South Korea, Taiwan, and India]. Although the CEW was already at multi-year lows, last week's devaluation of the Chinese yuan has intensified downside pressures in EM currencies, especially in Asia and in markets that export commodities. The chart breakdown in the EEM threatens to put more downside pressure on developed stock markets. The negative spread between emerging and developed markets is the worst since 2008 during the financial crisis. The negative spread between the EEM and U.S. stocks is the worst in ten years. Something has to give one way or the other. Emerging markets have to turn up, or developed stocks may start turning down. [A lot of EEM selling is tied to the plunge in Chinese stocks. China is the biggest EEM holding at 24%].
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Chart 2
NYSE COMPOSITE INDEX LEADS MARKET LOWER... My last message showed the NYSE Composite Index trading well below its moving average lines after peaking during May. It found support along its March low, but not enough to reverse its downtrend. In fact, its sideways pattern that's formed since early July has a bearish look to it (a descending triangle). That increases the odds for another downleg. The NYSE includes all stocks traded on the New York Stock Exchange, and is a much broader measure of the stock market than the large cap Dow or S&P 500 indexes. The fact that the NYSE is weaker than other stock indexes is reflective of deterioration in the broader market. That's also what falling breadth measures have been telling us. The red line on top of Chart 3 shows the percent of NYSE stocks above their 200-day moving average currently near 40% and in a downtrend. That means that two-thirds of big board stocks are in downtrends. That's not a good sign.
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Chart 3
SMALL CAPS WEAKEN EVEN MORE... Another sign of market weakness is seen in the relatively poor performance of small cap stocks. That's important because small caps usually peak before large caps, which is another sign of weak breadth. Chart 4 shows the Russell 2000 Small Cap Index (RUT) falling today after meeting resistance at its 200-day average (red line). It's not a good sign when a previous support line turns into resistance. The RUT is also trading below its May low. The RUT/SPX ratio (top of chart) has been falling since June and is threatening to drop below its early May low. That would be another negative sign for both the Russell and the S&P 500.
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Chart 4
S&P 500 RETESTS 200-DAY LINE... Chart 5 shows the S&P 500 Large Cap Index (SPX) threatening to drop below its 200-day average (red line). It hasn't closed below that major support line since early July. That fact that smaller stocks are already trading below their 200-day line increases the odds for the SPX to do the same. So does the fact that the NYSE Advance-Decline line in Chart 6 has been dropping since May, and has fallen below its 200-day average for the first time since 2011 (four years ago). That was also the last time stocks were in a downside correction.
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Chart 5
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Chart 6
SEMICONDUCTOR INDEX FALLS TO TEN MONTH LOW... Another sign of market danger is coming from the plunge in semiconductor stocks. Chart 7 shows the PHLX Semiconductor Index (SOX) falling to the lowest level since last autumn. Its falling relative strength ratio (dashed line) looks even worse. That's a negative sign for the technology sector. Some of the hardest hit chip stocks are suppliers of Apple and are being hurt by problems with that stock. Chart 8 shows Apple (AAPL) trading below its 200-day moving average. Apple is the biggest stock in the stock market.
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Chart 7
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Chart 8
HOMEBUILDERS SURGE ... Not all the stock market news is bad. Homebuilders are one of the few bright spots. An increase in building sentiment and the biggest jump in housing starts in six years have given a big boost to stocks tied to housing. The weekly bars in Chart 9 show the Dow Jones U.S. Home Construction iShares (ITB) surging to the highest level in eight years. The ITB/SPX relative strength ratio (solid line) has turned up as well. Homebuilders aren't the only winners. Home improvement stock Home Depot hit a new high as well. Homebuilders are also getting a boost from falling bond yields which lead to lower mortgage rates.
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Chart 9
DEFLATIONARY FORCES KEEP BOND YIELDS DOWN... Chart 10 shows the 10-year Treasury Note Yield peaking in June, and falling back to its 200-day moving average. Part of that is tied to money flowing into the safety of Treasury bonds as stock prices have weakened. Bond yields fall when bond prices rise. I also suspect that global deflationary forces are weighing on bond yields. The plunge in commodity prices like copper and oil to six year lows is deflationary, which is generally supportive to bonds (but not to stocks). Last week's devaluation of the Chinese yuan also threatens to export Chinese deflation to the rest of the world. That's also bond friendly. The recent upturn in homebuilders started a month ago when bond yields started to drop. Homebuilders generally do better when mortgage rates are dropping. Falling bond yields also hint at global economic weakness. That's not good for stocks. Neither is the fact that stocks are in the middle of the seasonally weak August/September period.
