FTSE ALL WORLD STOCK INDEX IS LOOKING A LOT STRONGER -- DOLLAR REMAINS WEAK ON DOVISH FED TALK -- THAT'S BOOSTING COMMODITIES AND MULTINATIONAL STOCKS -- NYSE ADVANCE-DECLINE IS TESTING SPRING 2015 HIGH
FTSE ALL WORLD INDEX OUT OF DANGER... Back on February 17, I wrote a market message showing the FTSE All World Stock Index ($FAW) starting to find support at its 2011 peak. [The FAW includes 2900 stocks in 47 developed and emerging countries, including the US]. I pointed out that was an important test because previous peaks should provide support on any subsequent corrections. That's why the flat line turns from red to green. Previous resistance becomes new support. That earlier message also showed the 14-week RSI line (top of chart) forming a "double bottom" near oversold territory at 30, which provided a "positive divergence" from the price action. It has since risen above 50 and broken a resistance line extending back to 2014. That suggests that momentum is now to the upside. The point of the earlier chart was to suggest the $FAW was at a logical spot for global stocks to stop falling and start forming a new bottom. That's what they've done. At the time, the FAW had lost 20% which skirted bear market territory. It has since regained more than half of its losses and is down less than 10%. Its short term trend is also improving.
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Chart 1
ALL WORLD INDEX CLEARS 200-DAY LINE... The daily bars in Chart 2 show the FTSE All World Stock Index clearing its 200-day average (red line) for the first time since last August. It has also risen above a falling trendline drawn over its May/November highs. That confirms the end of the global downturn that started last May, and that a new upleg has begun. Rising commodity prices have helped commodity exporters like Australia and Canada lead the global rally, as well as emerging markets tied to commodities like Brazil and Russia. A falling dollar has also boosted commodity currencies in developed and emerging markets. That's good for global stocks, including the US.
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Chart 2
DOLLAR REMAINS WEAK... Chart 3 shows the PowerShares US Dollar Bullish Fund (UUP) trading at the lowest level since last October. Recent dovish comments from the Fed (including yesterday) have pushed the greenback lower against all foreign currencies, developed and emerging. The dollar had rallied during the fourth quarter on expectations for Fed tightening and higher interest rates. With those hopes severely diminished by recent Fed statements, the dollar has lost ground. That has important implications for other markets. For one thing, it's good for commodities and stocks tied to them (both foreign and domestic). For another, it's positive for large cap multinational stocks in the U.S. that do a lot of foreign business. A lower dollar makes their exports more competitive. It's also giving a big boost to emerging market currencies and stocks.
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Chart 3
ADVANCE-DECLINE TESTS 2015 HIGH ... Some market analysts still expect another major downleg in the stock market once the current rebound is over. I don't that see that happening. Since the market bottom in February, I've shown a bunch of market breadth indicators that look a lot more bullish than bearish. The most basic one is the NYSE Advance-Decline line ($NYAD). The line is the cumulative difference between the number of advancing stocks on the big board minus the number declining. Its interpretation is very simple. It's bearish when the line is falling faster than the major stock indexes, and bullish when it's rising faster (as it is now). Chart 4 shows the NYAD line peaking last April and falling hard until August. That drop gave an early warning of a market correction during the second half of 2015, which took place last August. Another drop in the AD line in December warned of a January downturn. The NYAD line has since exceeded its fourth quarter high and is challenging its spring 2015 high. The AD line is usually a leading indicator for the stock market. A big selloff is highly unlikely with market breadth in such a strong position. Higher stock prices are a lot more likely.
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Chart 4
RISING GOLD PRICE MAY BE BOOSTING TIPS... The green bars in Chart 5 show a strong rebound in the Barclays TIPS Bond Fund since the start of the year. [TIPS stand for Treasury Inflation Protected Securities]. TIPS are bonds that pay more principal when inflation is rising. They appeal to bond investors who are starting to hedge against inflation. The solid matter in Chart 5 represents the price of gold. I'm struck by the visual correlation between the two assets, and the fact that both have risen sharply together since the start of the year. Other commodities have also gained, but gold has been the biggest winner. It's also the most visible of commodities and is viewed as a leading indicator of inflation. A falling dollar is helping push gold higher. The combination of a falling dollar, and higher gold, may also explain why fixed income investors are buying TIPS.
