GLOBAL STOCKS RALLY AS DOW CROSSES 20K -- ALL COUNTRY WORLD STOCK INDEX HITS NEW RECORD -- FOREIGN STOCK INDEX ACHIEVES BULLISH BREAKOUT -- DO DOES EUROPE -- RISING BOND YIELDS DRIVE MONEY OUT OF BONDS AND INTO STOCKS
ALL COUNTRY WORLD INDEX HITS NEW RECORD ... The Dow Industrials finally exceeded the 20K threshold that everyone in the media has been focused on. That's puts all major U.S. stock indexes in record highs. What's also impressive is that the current stock rally is global in scope. Chart 1 shows the MSCI All Country World Index iShares (ACWI) breaking through its spring 2015 highs to reach a new reocrd. The ACWI includes stocks from 23 developed and 23 emerging markets, and represents 85% of global equities. The U.S. accounts for 53% of its weighting, however, which accounts for most of its gains. A better way to gauge the performance of the rest of the world is by looking at a stock index outside the U.S. That too is showing improvement.
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Chart 1
VANGUARD FTSE ALL-WORLD EX-US INDEX HITS 18-MONTH HIGH... Chart 2 shows the Vanguard FTSE All-World ex-US ETF (VEU) trading at the highest level since the middle of 2015. Although the VEU remains well below its 2015 high, this week's upside breakout confirms that the rally in the U.S. is being supported by foreign stocks. It's always a good sign when global stocks are rally in sync with each other. The VEU includes foreign stocks from 50 countries. Its biggest weightings are in Europe (44%), the Pacific Region (30%), and emerging markets (18%). It also includes Canada which is less than a percent from a new record, thanks largely to rising commodity prices. European stocks are experiencing upside breakouts of their own.
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Chart 2
EUROPE TURNS UP ... Since Europe is the biggest part of the VEU, it's worth a closer look. And it looks good. Chart 3 shows the Dow Jones Europe - Ex UK Index breaking through its 2016 highs to reach the highest level in a year. This index is representative of continental Europe. [Britain FTSE Index has pulled back over the last week after hitting a record high]. Chart 4 shows that continental Europe has been in a downtrend since mid-2014. This week's upside breakout strongly suggests that downtrend has ended, and higher European stocks are in store. That's good news for the U.S. The downturn in Europe between mid-2015 and early 2016 contributed to selling in the S&P 500 (gray area). European bottoms in February, June, and November 2016 corresponded to upturns in the S&P 500 (see arrows). This week's upside breakout is the most positive chart action in two years. That adds more breadth to the global stock rally, and should benefit the U.S.
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Chart 3
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Chart 4
UPTURN IN BOND YIELDS CONTINUES... Last Thursday's message showed the 10-Year Treasury Yield ($TNX) bouncing off its 50-day moving average which may have ended its January pullback. It's still rising. The daily bars in Chart 5 show the TNX bouncing off its 50-day line for the second time on Monday. It's 14-day RSI line (above chart) is back over 50. More importantly, the MACD histogram bars have crossed back above their zero one for the first time in a month. [That means that the two MACD lines have turned positive]. Last week's message suggested that an upturn in bond yields would weaken bond prices and give a boost to stocks. Stocks have risen since then as bond prices have dropped. Bond weakness has also put a lid over rate sensitive stocks like utilities and REITs (and gold miners). But the jump in bond yields is lifting financial shares which are today's strongest sector. Banks and life insurers, which benefit the most from rising rates, are leading that sector higher.
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Chart 5
CONSTRUCTION AND MATERIALS INDEX HITS NEW HIGH... It's encouraging to see the stock market being led by economically-sensitive stock groups. Yesterday's message showed strong rallies in stocks tied to economically sensitive commodities. A lot of that enthusiasm is based on expectations for more infrastructure spending. So it's no surprise to see construction stocks leading the market higher as well. Chart 6 shows the Dow Jones US Construction and Materials Index hitting a record high today. Its relative strength ratio (top of chart) has also risen during January. Heavy construction stocks are also leading the industrial sector to new highs today. Upside leadership by financials and economically-sensitive industrial stocks is a healthy combination.
