EUROPEAN MARKETS BOUNCE ON FRIDAY BUT REMAIN IN DOWNTRENDS -- GOLD AND YEN ARE RISING TOGETHER FOR A REASON -- SO IS THE VIX -- TELECOM ISHARES CLOSE AT NEW RECORD -- VERIZON NEARS UPSIDE BREAKOUT -- REITS ARE ALSO GAINING AS BOND YIELDS DROP
A FRIDAY REBOUND IN BRITAIN AND EUROPE... All eyes are on the British Brexit vote this coming Thursday (June 23) on whether to stay in the European Union or leave. Latest polls show the "leave" vote in the lead. A relief bounce on Friday in Britain and Europe was encouraging, but not enough to turn their trends back up again. Chart 1 shows the British Pound gaining 1% on Friday after an upside reversal day on Thursday. Its trend since late May, however, is still down. It would have to clear its 50-day average to improve its short-term trend. Chart 2 shows a similar pattern in the London Times Financial Index (FTSE). The FTSE touched a four-month low early Thursday before rebounding. Initial overhead resistance exists at its May low near 6050. Moving average resistance is even higher. Eurozone stocks also rebounded on Friday but lost ground on the week. Chart 3 shows the German DAX still trading below its May low. The Euro also bounced.
(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
GOLD AND YEN ARE HIGHLY CORRELATED... One of the signs that global markets are on the defensive is simultaneous rallies in gold and the Japanese yen. Gold reached the highest level in eighteen months this week, while the yen hit a two-year high. That's not surprising because both markets usually trend in the same direction. What they have in common is that they usually trend in the opposite direction of global stocks. That's especially true in Japan. Chart 4 shows gold (orange bars) and the yen (green line) falling together from 2011 to 2015 before turning up together at the start of 2016. Gold and the yen showed a positive correlation of .82 during that period of time. Both, however, have shown a negative correction to global stocks since 2011. The upturn in the FTSE All World Stock Index (black line) in late 2011 coincided with peaks in gold and the yen. A 2015 peak in global stocks helped launch rallies in those two contrary markets. Gold and the yen have gained 22% and 15% respectively during 2016, while the global stock index has lost nearly -2%. That number is somewhat misleading however. U.S. stocks are relatively flat for the year (+1.3%). German and Japanese stocks, however, have lost -10% and -18% respectively. That shows that most of the global anxiety is being seen in Europe and Japan. Japanese stocks are especially vulnerable to a rising yen.
(click to view a live version of this chart)
Chart 4
FEAR GAUGE IS RISING... Another sign of nervousness is the recent rise in the Volatility (VIX) Index. Chart 5 shows the VIX (red line) rising above 20 this week before pulling back on Friday to end at 18.71. A rising VIX is usually associated with lower stock prices. Its current reading, however, is still relatively low. The VIX reached 40 last August as the S&P 500 lost -12%, and closed near 30 in February with the SPX down -13%. The SPX is down only -2% from its June high. In my view, the VIX would have to move a lot higher to signal a more serious correction in stocks (and the SPX would have to fall below its May low). The rise in the VIX reflects global concerns over the short run. Concerns related to the Brexit vote should be resolved one way or the other this coming week.
(click to view a live version of this chart)
Chart 5
TELECOM ETF CLOSES AT NEW RECORD... Utility stocks hit a new record high this week on the back of plunging bond yields. Telecom stocks, however, did even better (and for the same reason). While the Utility Sector SPDR (XLU) gained 0.78% this past week, U.S. Telecommunications iShares (IYZ) rose 2%. That made it the week's strongest sector. Chart 6 also shows the IYZ closing at an all time high. The IYZ/SPX relative strength ratio (top of chart) did the same. Telecom stocks also pay high dividends which attract new money when bond yields are falling. AT&T (T) is the biggest individual holding in the IYZ (11%). Chart 7 shows the stock trading at an all-time high. Its chart, however, looks over-extended with its 14-day RSI line (top of chart) trading in overbought territory over 70. Chart 8 shows Verizon (VZ) on the verge of an upside breakout which may put it in a more attractive technical situation. Verizon is the second biggest holding in the IYZ (10%).
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
DON'T FORGET REITS ... Real Estate Investment Trusts (REITS) came in second this week behind telecom and ahead of utilities. Chart 9 shows the Dow Jones REIT SPDR (RWR) gaining 1.42% over the past week. The weekly bars also show it not far from a record high (with its moving average lines in positive alignment). REITs pay out most of their income in the form of dividends which also gives them a boost when bond yields fall. Notice that REITs usually go up with the Ten-Year Treasury Yield (green line) goes down. That happened during 2014 and again during the first half of 2016. The RWR/SPX relative strength ratio (top of chart) also rises when bond yields fall. REITs are currently included in the financial sector. This autumn, however, REITs will become the eleventh separate market sector. That may force money managers who trade market sectors to increase their exposure to REITS. That's another reason to keep them on your radar screen.
(click to view a live version of this chart)
Chart 9
NASDAQ SLIPS BELOW 200-DAY LINE... The Nasdaq Composite Index lost nearly 2% this week (1.9%) making the worst of the major market averages. Chart 10 shows it also closing slightly below its 50- and 200-day moving average lines. That may put it on a path to retest its May low. The COMPQ/SPX ratio (top of chart) has also fallen this month. Most of this week's losses came from technology (and, to a lesser extent, biotechs). Internet stocks were the main technology drag by losing -3% for the week. A -3.9% loss in Alphabet (GOOGL) was a big reason why.
