U.S. STOCKS HAVE A STRONG AUGUST -- TECHNOLOGY, CONSUMER CYCLICALS, AND HEALTHCARE ARE SECTOR LEADERS -- U.S. STOCK UPTREND IS STRETCHED BUT STILL INTACT -- MEXICAN PESO STEADIES ON TRADE DEAL -- CANADIAN DOLLAR DROPS ON FRIDAY'S LACK OF AGREEMENT
STOCKS HAVE A STRONG AUGUST ... U.S. stocks had a strong August with the Nasdaq, S&P 500, Russell 2000, and Dow Transports hitting record highs. Technology, Consumer Cyclicals, and Healthcare saw the biggest percentage gains and hit record highs. The three weakest sectors were Energy, Materials, and Industrials. The Nasdaq had the month's biggest percentage gain at +5.7% and had the strongest August in 18 years. The S&P 500 gained +3% and the Dow Industrials 2.1%. The Dow has yet to hit a new record, but ended at the highest level in level in six months. The Dow has most likely been held back by its larger exposure to trade-sensitive stocks which are more vulnerable to trade tensions. Bond yields dropped during the month which kept a bid under dividend-paying consumer staples, utilities, and REITS. Most commodities lost ground, although crude oil gained +1.5%. Foreign stocks continued to lag behind the U.S, although they did rebound during the second half of the month. A pullback in the dollar provided some foreign support. The late August rebound in foreign shares may have helped push most U.S. stock indexes into record territory.
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Chart 1
VANGUARD TOTAL STOCK MARKET ETF SHOWS NO SIGN OF A TOP ... Chart 1 (above) shows the Vanguard Total Stock Market ETF (VTI) trading at a new record. As its name implies, the VTI measures the "total" U.S. stock market which includes large, midsize, and small stocks with exposure to both growth and value stocks. The VTI was led higher during August by smaller stocks which gained +4.2%. Large and midcap stocks gained +3% each. Growth stocks gained 5.4% while value stocks gained a smaller 1.4%. A strong technology sector kept growth stocks in the lead, while a relatively flat financial sector (and lower bond yields) continued to weigh on value stocks. Although its 9-day RSI line (top box) has reached short-term overbought territory over 70, there's so sign of its uptrend slowing. Moving average trends remain bullish. The VTI remains above all three moving average lines. In addition, the green 20-day line remains above the blue 50-day line which remains well above the red 200-day. The 20- and 50-day averages should provide support on any market pullbacks. U.S. stocks remain in uptrends, but are heading into the more seasonally dangerous month of September. That being said, midterm election years usually end with a strong fourth quarter.
MEXICAN PESO STEADIES WHILE THE LOONIE WEAKENS ON FRIDAY... Trading in foreign exchange markets quickly reflects progress in trade negotations (or the lack thereof). We saw a couple of examples this past week in the two charts below. Chart 2 shows the Mexican Peso rising 0.11% on Friday (after losing -2.5% during the month). The successful completion of a trade agreement between Mexico and the U.S. earlier this week probably accounts for its ending the month on a stronger note. By contrast, Chart 3 shows the Canadian Dollar gapping down -0.49% on Friday after negotiations between Canada and the U.S. failed to reach an agreement (although they will continue talking next week). The "loonie" had been rising since the end of June against the U.S. dollar before ending the month on a down note. Despite Friday's drop, the CDW remains above its two-month up trendline (green arrow). Friday's drop, however, shows that Canada has a lot at stake in the trade talks. That's especially true considering that 75% of its exports come to the U.S. And it has a stock market and currency that are much weaker than their U.S. counterparts.
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Chart 2
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Chart 3
CANADIAN STOCK MARKET CONTINUES TO UNDERPERFORM THE U.S.... The black weekly bars in Chart 4 show the Toronto Composite Index ($TSX) in an uptrend since the start of 2016. The red line to the upper right, however, show the TSX struggling to hold its January high. In addition, its 14-week RSI line is weakening a lot faster than the price action which suggests the possibility of more weakness ahead. The TSX/SPX ratio (gray area) shows Canadian stocks weakening against the U.S. throughout 2017 and again during July and August of this year. The TSX has a marginal gain for this year (+0.3%), but has lagged behind the S&P 500 2018 gain of +8.5%. As has been the case with most foreign stock markets this year, a weak local currency against the U.S. dollar has made their stocks less attractive to foreign investors. And U.S. stocks more attractive.
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Chart 4
WEAK CURRENCY WEIGHS ON CANADA ISHARES ... Chart 5 shows how Canadian stocks look to American investors. The red daily bars show the August peak in the MSCI Canada iShares (EWC) forming well below their January high. Friday's price drop (red circle) pushed it below its 50-day average and dangerously close to its 200-day line. That was largely due to Friday's drop in the Canadian Dollar. That's because the EWC is quoted in U.S. dollars. As a result, it loses more ground when the Canadian currency weakens against the U.S. dollar. And that's been the case for most of this year. The green line in Chart 5 shows the Canadian Dollar peaking at the end of January, and losing a lot of ground since then. That has caused the EWC to underperform its local benchmark (the TSX); and U.S. stocks even more. A weaker currency causes a country's stock ETF (quoted in U.S. dollars) to underperform its stock benchmark quoted in its local currency. Since the end of January, the EWC has lost -2.7% and has underperformed its local stock index (the TSX) by -4.6%. That weaker performance was due mostly to a -5.4% drop in the Canadian currency. The weaker Canadian Dollar also caused the EWC to underperform the S&P 500 by an even bigger margin of -5.5%. All of which suggests that Canada has more riding on the current trading negotiations than the U.S does. And judging from Friday's negative knee-jerk reaction, failure to reach an agreement would most likely be more damaging to Canadian markets. Hopefully, it won't come to that and some agreement will be reached between the two neighboring allies. I suspect both markets would react positively to that.
