LATE AUGUST REBOUND IN FOREIGN STOCKS HELPED PUSH U.S. STOCKS TO NEW RECORD -- AND CONTRIBUTED TO UPSIDE BREAKOUTS IN GLOBAL STOCK INDEXES -- THE DOW INDUSTRIALS ARE HEADED TOWARD THEIR JANUARY PEAK -- THE DOW TRANSPORTS HIT A NEW RECORD
FOREIGN STOCK ETFS ARE FINALLY BOUNCING ... Before leaving on vacation on August 15, I expressed concern about the fact that foreign stock ETFs were lagging too far behind the U.S. which could threaten the uptrend in the S&P 500 which was nearing a test of its January high. The message suggested that U.S. stocks needed more help from foreign stocks in order to reach new highs. In the two weeks since then, foreign stock ETFs have actually risen more than in the states. That helped support new highs by the S&P 500 and most other U.S. stock indexes. In addition, the August upturn has taken place in both foreign developed and emerging markets. Chart 1 shows the MSCI EAFE iShares (EFA) jumping nicely since mid-August and rising back above its 50-day average. The EFA (which includes Europe Australasia and the Far East) is now challenging a falling trendline drawn over its May/July peaks, and isn't far below its 200-day moving average (red arrow). Needless to say, an upside breakout would be good for it and the rest of the world. Chart 2 shows the MSCI Emerging Markets iShares (EEM) also ending the month of August on a strong note. The EEM has climbed back over its 50-day average (blue line), and is now challenging a falling trendline extending back to its March high. There again, a move above that resistance line would improve the outlook for emerging market stocks and the rest of the world. Both foreign stock ETFs got an added boost by a drop in the U.S. Dollar Index which peaked on August 15 and has lost more than -2% since then. That's because foreign ETFs are priced in dollars and do better when the dollar is dropping. A weaker dollar has also taken some pressure off emerging market stocks and currencies. Some improvement on the trade front has also been supportive.
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Chart 1
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Chart 2
A COUPLE OF GLOBAL STOCK INDEXES ARE BREAKING OUT ... The recent improvement in foreign stock performance has contributed to upside breakouts in a couple of global stock indexes. Chart 3 shows the MSCI All Country World iShares (ACWI) rising above previous peaks extending back to late February. That upside breakout puts the ACWI at the highest level since early February. The U.S. accounts for half of the ACWI and is still its main driving force. But it took a late August rebound in foreign stocks to help make that upside breakout possible. The same is true for the Dow Jones Global Index ($DJW). Chart 4 shows the DJW rising this week to the highest level since mid-March. That's another positive sign that the outlook for global stocks is improving.
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Chart 3
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Chart 4
DOW INDUSTRIALS NEAR OLD HIGH WHILE TRANSPORTS HIT NEW RECORD... The Dow Jones Industrial Average is the only major U.S. stock index that has yet to reach a new record. But it's heading in that direction. The daily bars in Chart 5 show the Dow having rising above 26K for the first time since early February, and heading toward its late January peak at 26.6K. The Dow rose above a falling "neckline" near the end of the July and has been gaining ground since then. After lagging behind the rest of the market since the start of the year, the blue chip index has gained more ground than the S&P 500 since the start of July. It's being led higher this week by Microsoft, DowDuPont, Visa, 3M, and Intel. The Dow Transports have already reached new highs. Chart 6 shows the Dow Jones Transportation Average recently trading above its January intra-day peak at 11423. After being led higher by rails and truckers for several months, a rally in airlines this past week helped push the transports to a new record. That's usually a good sign for the market. It also increases the odds that the Dow Industrials will probably follow in the same direction.
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Chart 5
