RISING CHINESE STOCK MARKET IS BOOSTING INDUSTRIAL METALS AND STOCKS TIED TO THEM - THE GLOBAL METALS AND MINING PRODUCERS ISHARES HAVE TURNED UP -- RISING COMMODITY PRICES HELPED MAKE MATERIALS THE WEEK'S STRONGEST SECTOR

POSITIVE IMPLICATIONS FROM A STRONGER CHINA... My Thursday message showed an index of foreign stocks turning higher, which relieved concerns that weaker foreign stocks could start to weigh on U.S. stocks (as they did near the end of last year). To the contrary, rising foreign stocks are now supporting the rally in the U.S. And may also be suggesting that foreign economies may be taking a turn for the better. Today's message is drilling down a bit more on that foreign stock rally, and drawing a few more conclusions. The foreign rally includes developed and emerging markets. With China in the lead. Chart 1 shows the Shanghai Stock Index ending the week at the highest level in twelve months. Moving average trends are now bullish. Not only is the SSEC trading well above its red 200-day average; but its blue 50-day average has crossed over its red line. Shanghai stocks have gained 30% since the start of the year, which is twice as much as the S&P 500 gain of 15%. That's a dramatic role reversal from 2018 when Chinese stocks were among the weakest stocks in the world. This year's upturn carries a number of positive implications.

Thursday's message also suggested that the upturn in China was translating into higher prices in other markets. That includes higher Asian stocks in South Korea and Taiwan; as well as semiconductors here in the states. That also includes Australian stocks which are highly correlated to the direction of Chinese stocks. That's because China is a big buyer of Australian commodities like copper and iron ore which are now rising. And that's helping stocks that mine those commodities. Chart 2 shows the MSCI Global Metals & Mining Producers iShares (PICK) also bottoming at the end of last year, and now in rally mode. The red line below Chart 2 shows the 60-day Correlation Coefficient between the two markets at .89. That means that the two trade in the same direction nearly 90% of the time. The PICK includes stocks that mine aluminum, copper, steel, and iron ore. Its two biggest holdings are Australia-based BHP Billiton and Rio Tinto (RIO), both of which are hitting new yearly highs. It also includes U.S. miners Freeport McMoran (copper), and Nucor (steel). Those two stocks helped make materials this week's strongest U.S. sector.

Chart 3 shows the Materials Sector SPDR (XLB) surging to the highest level in six months, and clearing its 200-day average by a wide margin. The XLB was led higher by commodity chemicals, alumimun, steel, and copper stocks. Some of that new confidence may be coming from higher Chinese stocks. Crude oil may also be getting support from renewed confidence in Asia and the U.S. economy.

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Chart 1

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Chart 2

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Chart 3

CRUDE OIL CLEARS ITS 200-DAY LINE -- THE XLE MAY BE NEXT ... Crude oil is another commodity that bottomed with the Chinese market at the end of last year. And it may also be benefiting from new confidence in the global economy. Chart 4 shows the price of WTIC Crude Oil ending the week on top of its 200-day moving average (red line) for the first time since last October. It's also gained 38% since the start of year which makes it a commodity leader. That may be enough to give a bigger boost to energy shares which are nearing a potential upside breakout of their own. Chart 5 shows the Energy SPDR (XLE) nearing a test of its red 200-day average. The XLE is the only sector that has yet to clear its red line. The gray area on Chart 5 plots a relative strength ratio of the XLE divided by the S&P 500. After underperforming the SPX last year, the ratio bottomed during December and has been trending sideways since then. The XLE/SPX ratio may be ready to move higher and start showing some upside leadership.

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Chart 4

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Chart 5

GERMAN DAX IS ALSO LOOKING STRONGER ... My Thursday message showed stocks in the eurozone starting to rally as well, and suggested that region might also start to benefit from a stronger China. A Wall Street Journal article this morning (We Seem To Have Sidestepped a Recession for Now, page A2) attributes about three-quarters of Europe's slowdown to a drop in exports to Asian countries that are part of China's supply chain. The WSJ article further suggests that a Chinese recovery could boost eurozone GDP growth from 1% to 1.5%. That would reduce the chances for a eurozone recession. Another encouraging sign is coming from Germany which is the biggest economy in that region and which is showing a more positive chart pattern.

The weekly bars in Chart 6 show the German DAX Index ending the week on top of its 40-week moving average for the first time since last summer. It has yet to clear the falling trendline drawn over its 2018 highs. But it appears headed on that direction. In addtion, its 14-week RSI line (upper box) has moved over 50 and looks positive. Its weekly MACD lines (lower box) are also positive. An upturn in German stocks would go a long way to increasing confidence in that region. The solid red line overlaid on the blue price bars shows a strong correlation between the DAX and Shanghai stocks. They fell together last year, and are rising together this year. Which supports the idea that a stronger Chinese market should be good for Germany and the eurozone, as well as the global economy.

Chart 6