BREADTH INDICATORS TURN UP -- DOLLAR WEAKNESS SHOULD START TO HELP EARNINGS -- SO SHOULD A REBOUND IN ENERGY AND MATERIALS -- AND A REBOUND IN EMERGING MARKETS -- UPTURN IN EM CURRENCIES SUPPORTS EM STOCK ADVANCE
PERCENT OF STOCKS ABOVE MOVING AVERAGE LINES TURNS UP ... Breadth indicators continue to show marked improvement. My Wednesday message showed the percent of NYSE stocks above their 50-day average turning up. I stated that it needed to climb above 50% to turn its trend higher. The blue line in Chart 1 shows that value climbing to 60%. That means that two-thirds of big board stocks have cleared their 50-day lines. That's its strongest upturn this year, and suggests the most NYSE stocks have probably bottomed. The red line in Chart 1 measures the percent of big board stocks above their 200-day average. Turns in that line are slower, but carry more significance because it measures the market's major trend. This week's upturn has pushed the red line above its mid-September peak to 30%. It is now testing a falling trendline extending back to May. That's the first buy signal given in that index from oversold territory below 30% since the fourth quarter of 2011. That upturn suggests that the 2015 correction has most likely bottomed.
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Chart 1
NYSE BULLISH PERCENT INDEX TRIGGERS BUY SIGNAL ... Chart 2 is a point & figure chart of the NYSE Bullish Percent Index ($BPNYA). The index measures the percent of NYSE stocks in point & figure uptrends. A P&F chart shows alternating X and O columns. X columns show rising prices, while O columns show falling prices. A sell signal is triggered when a falling O column falls below a previous O column. The last sell signal took place during July. The green X in the last column has just exceeded a previous X at 42. That constitutes a buy signal in this market breadth indicator. That last buy signal from this low a level took place in October of 2011, which was the last time the market ended a downside correction. The red letters identify the start of calendar months. The red letters A, B, and C mark the starts of October, November, and December. This October's upturn also suggests that the stock correction has probably bottomed.
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Chart 2
DOLLAR WEAKENS ... With expectations for a 2015 Fed rate hike pretty much off the table, the U.S. dollar has weakened. The red bars to the bottom right of Chart 3 show the PowerShares Dollar Index ETF (UUP) failing a test of its moving average lines. In fact, the dollar has been weakening since March. And therein lies several important messages. The strong dollar has been cited by several U.S. companies as a reason why their earnings have disappointed. The strong dollar has also been cited as a reason why the upcoming third quarter earnings are expected to be weak. But the dollar has lost -6% since March. How can that be negative for future multinational stock earnings? Another reason given for weak earnings is the plunge in crude oil and energy companies. That situation has improved as well. Part of the reason for that is a weaker dollar which has boosted energy and material stocks along with their respective commodities.
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Chart 3
ENERGY IS REVIVING... Thanks partially to a weaker dollar, and the likelihood of lower rates for longer, energy prices have been rising with most other commodities. My Wednesday message suggested that commodity prices had probably bottomed. The daily bars in Chart 1 show the Energy SPDR (XLE) rising above its 50-day average to the highest level in two months. It went from the weakest to the strongest part of the stock market during those two months. [The same is true of basic material stocks]. The daily bars on top of Chart 4 show WTIC crude oil close to exceeding $50 for the first time in three months. Bad earnings in the energy and mining sectors are being given as a big reason why earnings going forward will be weak. Analysts are acting as if energy prices are still falling. That's backward thinking. Market prices lead fundamental factors like earnings. The fact that energy and material stocks appear to be bottoming suggests that future earnings in those two sectors should start getting better instead of worse. That's why we look at forward-looking markets instead of backward-looking fundamentals. That's one of the basic premises of technical analysis.
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Chart 4
EMERGING MARKETS START TO IMPROVE... Another reason being offered for lower earnings is weakness in emerging markets -- owing to weak commodities, prospects for higher interest rates in the U.S., and a stronger dollar. At the moment, all three threats have been reduced (if not reversed). As a result, we're seeing a rebound in EM assets. On Monday, I showed a very oversold Emerging Markets iShares (EEM) bouncing off important chart support at its 2011 low. The daily bars in Chart 5 show the EEM now trading at the highest level in two months. Its short-term trend has turned up. It still has to clear its (red) 200-day average to signal a major upturn. But there's a strong chance that EM stocks have bottomed. Interestingly, the strongest gainers have been commodity producers like Brazil, Mexico, and Russia. Chinese stocks are also rebounding, as are Asian stocks in South Korea and Taiwan. Analysts are still reacting to past weakness in EM stocks. They may have to start factoring in the possibility of future strength.
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Chart 5
EMERGING CURRENCIES ARE ALSO BOUNCING... My message from July 30 carried the headline: "Emerging Market Currencies Hit New Lows While EM Stocks Threaten Support Levels". Since the two markets are highly correlated, I was warning that a breakdown in one could lead to similar fate in the other. Shortly thereafter, EM stocks followed their currencies to a four year low. We're now seeing a more positive picture. The green line in Chart 6 shows the Wisdom Tree Dreyfus Emerging Currency Fund (CEW) climbing back above its 50-day line to a two-month high. That a direct effect of a weaker dollar. There again, the CEW has a way to go to reverse its major downtrend. But the fact that it's rallying adds support to emerging market stocks. I hope stock market analysts are factoring these more positive intermarket developments into their earnings forecasts.
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Chart 6
S&P 500 TESTS SEPTEMBER HIGH ... Stocks have reached another important test. The daily bars in Chart 7 show the S&P 500 having cleared its 50-day average (blue line). It is, however, still testing a more formidable overhead barrier at 2020. The SPX, however, has to clear its September high to set up a more important test of its 200-day average (red line). Its daily RSI and MACD lines are now positive. Its weekly indicators, however, carry a more mixed message.
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Chart 7
WEEKLY MACD LINES SHOW SOME IMPROVEMENT ... Weekly indicator signals are more important than daily signals, which is why it's important to consult weekly charts. The weekly indicators on Chart 8 offer both good and bad news. One good sign is that the 14-week RSI line (top of chart) is bouncing from the most oversold reading since 2011 (black arrows). The weekly MACD lines offer a more mixed message. The two lines last turned negative during May and remain so (red arrow). The fact that the faster black line has started to turn up is encouraging, as is the fact that it is starting to find support near its October 2011 low. Even so, the black line still needs to cross back above the red line to turn the trend back up again. Chart 9 gives a closer look at the MACD histogram bars (which measure the difference between the two lines). The histogram bars have risen for five weeks, which means that the spread between the two MACD lines is narrowing (or converging). That's a positive sign, because the two MACD lines have to converge before they can turn positive. A rise above the histogram zero line (left scale), however, is necessary to signal a positive crossing in the two MACD lines. That's a necessary ingredient in any important market upturn.
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Chart 8
