FTSE ALL-WORLD INDEX STALLS AT RESISTANCE LINE -- RISING EURO HURTS GERMANY ISHARES -- SURGING YEN PUNISHES JAPANESE STOCKS -- OVERBOUGHT DOW INDUSTRIALS NEAR OVERHEAD RESISTANCE -- WILSHIRE 5000 TESTS MAJOR RESISTANCE LINE -- SO DO DOW TRANSPORTS
FTSE WORLD INDEX BACK BELOW 200-DAY LINE... Last Wedneday's message showed the FTSE All World Stock Index ($FAW) trying to move above its 200-day moving average. Although it rose above that resistance line for a couple of days, Chart 1 shows that it's back below it again. That nullifies last week's upside move. In addition, the 14-day RSI line (top of chart) had reached overbought territory near 70 (blue arrow). That was its most overbought reading since since October. Renewed selling in overseas markets in particular is hurting the $FAW. The FAW includes stocks in 47 developed and emerging markets (including the U.S.). Although large cap U.S. stock indexes have cleared their 200-day lines, foreign developed stocks have yet to do so. Developed markets that remain below their 200-day averages include Australia, Canada, Britain, France, Germany, and Japan. That lack of global "breadth" (and the fact that they've started to weaken this week), could cause the U.S. stock rally to stall as well (more on that shortly).
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Chart 1
RISING CURRENCIES HURT FOREIGN SHARES... A weak dollar is generally viewed as being supportive to large cap mutinational stocks in the U.S. Unfortunately, the weaker dollar is hurting foreign stocks. Germany is the largest economy in Europe. Chart 3 shows Germany iShares (EWG) backing off sharply from their 200-day average this week. Part of the reason is the rising Euro. The green line at the bottom of Chart 3 shows the Euro starting to rebound in early December. That's when the EWG and other eurozone stocks started to weaken (see arrows). A stronger Euro hurts their exports. The negative impact of a rising currency is even worse in Japan.
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Chart 2
RISING YEN HURTS JAPANESE STOCKS... Japanese stocks have fallen -17% this year which makes it one of the world's weakest markets. The surging yen is a big reason why. The orange line in Chart 4 shows Japan iShares (EWJ) trading below their 50- and 200-day moving averages. The green line shows the Japanese yen trading at the highest level in 17 months. The yen has gained 9% this year to make it the world's strongest major currency. Unfortunately, that's bad for export oriented Japanese stocks. Chart 4 shows the upturns in the yen last August and December coinciding with downturns in the EWJ (see arrows). The yen is also viewed as a safe haven currency, which means that it attracts money when investors are nervous about global stocks. Nervous money has also been flowing into other safe havens like gold and government bonds. Selling in foreign stocks usually spills over to the U.S. stock market which is in an overbought condition.
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Chart 3
OVERBOUGHT DOW UP AGAINST DECEMBER HIGH... The daily bars in Chart 4 show the Dow Industrials up against an overhead resistance zone starting at its December high near 17800 and ranging up to its early November high just below 18000. The 14-day RSI line, however, has formed a small "double top" in overbought territory above 70. That suggests that the Dow is starting to encounter some short-term profit-taking. Even if it does, the Dow's uptrend is still intact and will remain so as long as it remains above its 200-day line (red arrow). The same is true of the S&P 500. U.S. stocks, however, will have a difficult time overcoming fourth quarter highs without more help from foreign stocks. The U.S. market also needs more help from some weaker parts of its own.
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Chart 4
WILSHIRE 5000 TESTS MAJOR RESISTANCE LINE... I recently showed the S&P 600 Small Cap Index ($SML) testing a resistance line going back to last summer, and wrote that it needed to clear that line to broaden out the market rally. The daily bars in Chart 5 show the Wilshire 5000 Composite Index ($WLSH) also testing a falling trendline drawn over its July/November highs. The WLSH has cleared its 200-day line, but needs to also clear the resistance line to turn its major trend higher. I chose the Wilshire 5000 because it is the broadest measure of the U.S. market. Its message here is that the market has reached another test of the staying power of the current rally.
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Chart 5
DOW TRANSPORTS STRUGGLE WITH RESISTANCE... The daily bars in Chart 6 show the Dow Transports also meeting resistance at its 200-day average and a falling trendline extending back to last February. What the transports do from here may also have some bearing on the Dow Industrials (gray line). The industrials usually do better when the transports are rising as well (last September and this first quarter). Weaker transports are usually bad for industrials (last summer and December). The current position of the transports is another big test for the market.
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Chart 6
HEALTHCARE SPDR TESTS 200-DAY LINE... Healthcare stocks continue to get better. Chart 7 shows the Health Care SPDR (XLV) testing its 200-day average today. The XLV/SPX ratio (top of chart) has turned up for the first time in three months. A number of biotech and drug stocks are having a good chart day. Chart 8 shows Amgen (AMGN) bouncing decisively off its 200-day average. Chart 9 shows Bristol Myers Squibb (BMY) breaking out to a new three-month high. Chart 10 shows Pfizer (PFE) surging nearly 4% to clear its 200-day line. After underachieving for most of the first quarter, healthcare has become the market's hottest sector.
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Chart 7
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Chart 8
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Chart 9
