MAJOR STOCK INDEXES FALL BELOW 200-DAY AVERAGES -- PLUNGING RETAILERS WEAKEN CONSUMER DISCRETIONARY SPDR -- CRUDE OIL HEADED FOR TEST OF AUGUST LOW -- RISING DOLLAR PUSHES CRB INDEX BELOW 2008 LOW
MAJOR STOCK INDEXES FALL BELOW 200-DAY AVERAGES... The market suffered a setback this week when major U.S. stock indexes fell back below their 200-day averages. Chart 1 shows the Nasdaq Composite ending below that support line on Friday. Chart 2 shows the Dow Industrials spending Thursday and Friday below its 200-day line. And Chart 3 shows the S&P 500 doing the same. All three indexes are testing chart support along their September peaks and 50-day averages. A close below both lines would signal a deeper correction. Although the actual price losses weren't that severe, heavier trading during the selloff isn't a good sign. Seven of the nine sector SPDRs are trading below their 200-day lines. Financials and industrials fell below their 200-day lines on Friday. The only two sectors above that support line are technology and consumer cyclicals. Finally, the percent of NYSE stocks above their 200-day average fell back to 27%.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
CONSUMER DISCRETIONARY SPDR TUMBLES ON FRIDAY ... One of the market's bright spots this year has been leadership by economically-sensitive cyclical stocks. That situation took a turn for the worse on Friday. Chart 4 shows the Consumer Discretionary SPDR (XLY) falling -2.6% on Friday to lead the rest of the market lower. And it did so in heavy trading. It's now headed for a test of its moving average lines. Most of the XLY selling was the result of a rout in retail stocks.
(click to view a live version of this chart)
Chart 4
RETAILERS TUMBLE ... Saying that retailers had a bad week is an understatement. They had a terrible week. Chart 5 shows the S&P Retail Index SPDR (XRT) tumbling -3.8% on Friday to its lowest intra-day level since August (down -8.4% for the week). That was its lowest closing price since the previous October. And the selling on Thursday and Friday came in heavy trading. The falling red line on top of Chart 5 shows how badly the XRT/SPX ratio has done this year. Since the start of April, the XRT has lost -15% versus a -2% loss in the SPX. The biggest headline losers were Macy's (-20%) and Nordstrom (-18%). But most apparel and department store stocks fell as well. [Even Amazon.com, an online retailer with much better numbers and a strong chart pattern, lost -3.5% on Friday]. Needless to say, that kind of selling in such a key economic group is troubling both for the market and the economy. Consumer spending accounts for two-thirds of the economy. This week's retail plunge may be warning not to expect too much from this year's holiday season. It may also be giving the same warning about the strength of any Santa Claus rally in stocks.
(click to view a live version of this chart)
Chart 5
CRUDE OIL NEARS TEST OF AUGUST LOW ... Another depressant on stocks this week was the sharp drop in commodity prices and stocks tied to them. Copper fell to the lowest level in six years which caused copper shares to lose -11% on the week. Energy was the week's biggest sector loser with a weekly drop of -5.4%. That resulted from the fall in the price of Light Crude Oil to the lowest level since August. Chart 7 shows WTIC nearing a test of its August low near $38. The WTIC rally failed at its 200-day average (red arrow). Heavy selling in commodity stocks also contributed this week's selling in stocks. The plunge in crude during July pulled energy shares lower and weighed on the broader market. The oil rebound in late August helped stabilize energy shares and the rest of the market. Its recent drop has unsettled both. Crude and other commodity prices bear close watching. The last thing the market needs now is another downleg in miners and oil producers.
(click to view a live version of this chart)
Chart 6
RISING DOLLAR PUSHES COMMODITIES TO 14-YEAR LOW... Chart 7 shows just how bad the commodity slide has become. It shows the Reuters/Jefferies CRB Index (of 19 traded commodities) falling to the lowest level since 2001. That puts it even lower than at the bottom of the 2008 financial crisis. The main reason for the commodity downturns in 2008, 2011, and again this year were upturns in the U.S. Dollar Index (green arrows). During the past ten years, the rolling 100-week correlation between the two indexes is a minus -96%. That means that when the dollar goes up, commodities fall 96% of the time. The most recent jump in the dollar started this October with a strong jobs report increasing odds for a December rate hike. That started the most recent commodity slide. That puts the Fed in a strange place. It wants to see some evidence of commodity price inflation (which would signal stronger global economic conditions) to support a rate hike. But a rate hike strengthens the dollar, which weakens commodities even more. That's especially true with the ECB talking about more easing in December which is weakening the Euro against the dollar. Weaker commodities also hurt foreign stocks that produce commodities like Australia and Canada, as well as several emerging markets. Falling commodities may also be tied to a weaker Chinese economy. Falling commodities may also explain why so many foreign stocks are doing worse than in the states.
(click to view a live version of this chart)
Chart 7
FOREIGN STOCKS UNDERPERFORM... A strong global stock market should be broad-based among domestic and foreign developed and emerging markets. That's certainly not the case right now. The daily bars in Chart 8 show the Vanguard FTSE All-World ex-US ETF (VEU) trading well below its (red) 200-day average (and falling below its 50-day line on Friday). The VEU includes foreign developed stocks with a 25% weight in emerging markets. Unlike EAFE iShares, the VEU includes big North and South American countries like Brazil and Canada. The VEU rally stalled at a falling resistance line starting in May. It had regained only half of its May/August decline. The S&P 500 by contrast came within a couple of percentage points of its summer high. The VEU has lost -12% since May versus a -3% drop in the SPX. Foreign developed stocks accounted for -9% of that foreign loss, while emerging markets fell -21%. That's a pretty big negative divergence between the U.S. and foreign stocks. Some of the biggest foreign losers were commodity producers. Australia and Canada lost -11% and -14% respectively. Among the biggest EEM losers were Brazil (-34%) and Russia (-18%). That suggests that commodity weakness is one of the reasons that foreign stocks are lagging behind the U.S. That's not necessarily good for the U.S. Selling in foreign stocks has a way of spilling over to the states. Global stocks also become more highly correlated when everyone starts selling.
