FOREIGN STOCKS LEAD U.S. LOWER -- EMERGING MARKETS AND EAFE ISHARES FALL TO LOWEST LEVEL IN A YEAR -- STRONGER DOLLAR AND WEAKNESS IN CHINA PUSH METALS LOWER AND STOCKS TIED TO THEM -- ENERGY STOCKS ARE ALSO WEAKENING WITH OIL
FOREIGN STOCK ETFS FALL TO NEW LOWS... Last Thursday's message expressed concern that weakness in foreign stocks could start to weigh on U.S. stocks, especially with the S&P 500 testing major resistance at its January high. That dangerous situation has taken a turn for the worse. Chart 1 shows the Vanguard FTSE All-World ex-US ETF (VEU) tumbling to the lowest level in a year. Emerging markets are leading it lower. The middle red line shows Emerging Markets iShares (EEM) hitting new lows as well. That's a continuation of the downturn in emerging market stocks and currencies that started near the end of last week with the plunge in the Turkish lira. Today's EM plunge is being led by Chinese stocks. Even more disturbing is the drop to new lows by foreign developed markets. The lower blue line shows EAFE iShares (EFA) also falling to a new yearly low. Europe is a big part of that drop. That of course is taking a toll on U.S. stocks which are also under pressure. Stocks tied to commodities are taking the biggest hit.
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Chart 1
COMMODITY STOCKS ARE TUMBLING ... My message from last Wednesday explained that the rising dollar was putting downside pressure on commodity prices and stocks tied to them. Since then, the US Dollar Index has risen to the highest level in fourteen months and weakened commodities even more. Weak economic news out of China, and its falling currency and stock market, are also hurting commodity prices which are down sharply today. China is the world's biggest importer of commodities. Gold and gold miners have been hit the hardest. Chart 2 shows the VanEck Vectors Gold Miners ETF (GDX) plunging to the lowest level in eighteen months (with gold). Chart 3 shows the Materials SPDR (XLB) falling to a three-month low. It's being led lower by copper and aluminum stocks as well as gold miners. Energy shares, which have held up better, are weakening with the price of oil. Chart 4 shows the Energy SPDR (XLE) falling to the lowest level in four months. Base metal and energy prices are falling sharply today.
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Chart 2
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Chart 3
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Chart 4
S&P 500 PULLS BACK FROM JANUARY HIGH... The downturn in foreign stocks late last week took place just as the S&P 500 was testing major overhead resistance at its January high. This week's downturn has caused the SPX to pull back further from that test. The daily bars in Chart 5 show the S&P 500 pulling back toward initial support along its June high (flat line) and its 50-day moving average (blue arrow). They're the first two lines of defense for the SPX. Any close below them would signal more selling. Nine of eleven sectors are in the red today, with the biggest losses in energy, materials, technology, consumer cyclicals, and industrials. Defensive staples and healthcare stocks are holding up better. Utilities and REITs are the only two in the black, which is due mainly to flight to safety buying of Treasury bonds and another drop in bond yields. The CBOE Volatility (VIX) Index has risen 20% to 16 which is the highest level in six weeks. That fits the historical seasonal pattern of August being one of year's most volatile months.
