JAPANESE STOCKS HAVE BIGGEST JUMP IN SEVEN YEARS AS YEN DROPS -- RISING BOND YIELDS HELP BANKS AND INSURERS -- BUT HURT REITS AND UTILITIES -- OVERSOLD COPPER AND COPPER STOCKS ARE BOUNCING OFF MAJOR CHART SUPPORT AND MAY BE SCRAPING BOTTOM
JAPANESE STOCKS BOUNCE OFF MAJOR SUPPORT LINE... Japan was the only country that didn't participate in yesterday's global stock rally. It's making up for that today in a big way. And at a good time. I've been showing a lot of global stock indexes that are bouncing off important support levels to keep their uptrends intact. Add Japan to that list. The weekly bars in Chart 1 show the Toyko Nikkei Average ($NIKK) bouncing sharply off a major support line drawn under its 2012/2014 lows. Today's jump of 1343 points (7.7%) is the biggest gain since October 2008. That's good for Japan and developed markets in general. Yesterday, I showed EAFE iShares bouncing off important support levels to maintain its long-term uptrend. Japan is EAFE's biggest holding at 23%. Japanese stocks are getting an added lift from a weaker yen.
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Chart 1
JAPANESE YEN WEAKENS ... Japanese stocks benefit from a weaker yen because of their reliance on exports. Chart 2 shows the Japanese yen falling below its 200-day average today (red line) after its recent spike. There are two pieces of good news there. Most obvious is the fact that a weaker yen is good for Japanese stocks. The second is that the yen is viewed as a safe haven currency. That explains its spike higher during the second half of August as global markets tumbled. The fact that some money is starting to leave the yen suggests less demand for safe haven assets and more confidence in global stocks. A weaker yen, however, would increase the need for foreign investors to hedge against currency losses in Japan.
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Chart 2
TREASURIES CONTINUE TO WEAKEN ... Treasury bond prices are another safe haven that are starting to weaken as bond yields climb. Chart 3 shows the 10-Year T-Note yield climbing again today. Within the financial sector, rising bond yields are good for some groups and bad for others. Previous messages on that subject have explained that banks and life insurers benefit from higher yields. Banks can charge more their loans, while insurers earn more money on their fixed income portfolios. That explains why those two groups are leading the financial sector higher today. Chart 4 shows the Dow Jones US Banks Index bouncing today. It remains in a holding pattern below its moving average lines. The good news is it that remains above chart support at last October's low. Its relative strength ratio (above chart) is also bouncing off an eight-month support line. Relative strength during a market correction is a good sign for any group. Chart 5 shows a similar pattern for the Dow Jones US Life Insurance Index. REITs and insurers are a different story.
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Chart 3
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Chart 4
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Chart 5
RISING YIELDS HURT REITS AND UTILITIES ... REITS and utilities are hurt by rising bond yields. Utilities are like bond-proxies that rise and fall with Treasury prices. Right now, both are falling. Utilities also pay dividends which are less attractive when bond yields are rising. Investors can get higher yields from bonds and have less need for stock dividends. The same is true of REITS which pay out ninety percent of their income in dividends. It's no surprise then to see both groups doing so badly. Chart 6 shows the Dow Jones REIT Fund (RWR) trading at a new 2015 low. Notice that it usually falls when bond yields (green dashed line) rises. The same is true of utilities. Chart 7 shows the Utilities Select SPDR (XLU) also trading at a new 2015 low. That's the market's way of telling us that it expects bond yields to start climbing.
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Chart 6
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Chart 7
COPPER MAY BE BOTTOMING ... On August 27, I wrote a message with a headline: "Energy Stocks and Crude Are in Chart Support and Deeply Oversold". Since then, energy stocks and crude have rebounded. Today, I'm going to apply the same analysis to copper and copper stocks which appear to be in a similar situation. Copper first. The monthly bars in Chart 8 show the price of copper (on a log scale) trying to bounce off a major uptrend line drawn under its 2001/2008 lows (circle). [Long-term trendlnes are more effective with log scales]. At the same time, the 14-month RSI line is at the most oversold level since 2008 (see arrows). It's also showing a slight positive divergence. That 's not enough to push copper into a bull market. But is may be suggesting that copper is scraping bottom. The same may be true of copper shares.
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Chart 8
COPPER SHARES TEST 2008 LOW... The weekly bars in Chart 9 show the Dow Jones US Nonferrous Metals Index testing major chart support at its 2008 low. That's a very important test and a logical spot for it to attempt a bottom. The green line shows the 14-week RSI Index in a deeply oversold condition below 30. More importantly, the "double bottom" in the RSI line since the end of 2014 represents a potential "positive divergence". That's may be enough to start attracting some funds into this beaten-down and very oversold group.
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Chart 9
FREEPORT-MCMORAN BOUNCES OFF CHART SUPPORT... Freeport-McMoran (FCX) is a good proxy for copper stocks in general. The weekly bars in Chart 10 show the copper bellwether starting to rebound from potential chart support along its 2008 low (see circles). At the same time, its 14-week RSI line (below chart) is the most oversold since 2008, and is showing a potential "positive divergence" as well (see box). [A positive divergence is present with the RSI line forms two bottoms while prices are still declining]. Since copper stocks and the commodity are positive correlated, a bottom in FCX may also hint at a bottom for the commodity. Freeport-McMoran (FCX) has gained 10% over the last week to lead a rebound in the basic material sector. Copper prices have rebounded as well on reports of production cuts in Africa. The potential for a bottom in copper and oil (along with their respective stocks) would reduce deflation fears resulting from falling commodity prices. Since both commodity groups are economically-sensitive, any bottom-fishing there would be consistent with a stronger global economy. Firmer prices might also relieve pressure on commodity exporters like Australia and Canada, as well as several emerging markets. Firmer commodity prices may also be hinting the the worst of crisis in China might be over. That should be supportive to global stocks. It would also pave the way for higher global interest rates (especially in the U.S.). The rotation into banks and insurers, and out of REITS and utilities, suggest the market is already expecting that.
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Chart 10
S&P 500 STALLS NEAR LATE AUGUST HIGH... Today's early stock bounce is fading at midday. The daily bars in Chart 11 show the S&P 500 backing off from its late August peak. That coincides with the falling 20-day moving average (green line) which is another barrier. Unless the SPX can clear both hurdles, it will remain locked in the short-term trading range that started a couple of weeks ago. That's not too surprising since it's going to take more time to repair summer damage. That might even include a retest of its summer low. The hourly bars in Chart 12 shows the SPX stalling below initial resistance at 1993. It needs to clear that barrier to improve its short-term trend.
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Chart 11
