S&P 500 STILL NEAR RECORD TERRITORY BUT LOOKING VULNERABLE -- WEEKLY INDICATORS SHOW LOSS OF UPSIDE MOMENTUM -- ALL COUNTRY WORLD INDEX IS MEETING RESISTANCE AT ITS EARLY 2018 PEAK -- WHILE FOREIGN STOCK INDEX IS STALLING AT ITS 62% RETRACEMENT LEVEL
S&P 500 UPTREND MAY BE TESTED...Global weakness has become a major theme for financial markets. Even the Fed's so-called "data dependence" relies more on developments in foreign economies and markets. That includes falling foreign interest rates which are pulling bond yields down in the states; and weak foreign currencies that are boosting the dollar and pushing commodity prices lower. Global money is continuing to flow into government bonds, gold and safe haven currencies like the Japanese yen. U.S. stocks aren't immune from global weakness. And this looks like a good time to pay more attention to the potential threat from weaker foreign stock markets. Let's start with the U.S. which is the strongest in the world.
LOSS OF MOMENTUM...The weekly bars in Chart 1 show the S&P 500 having exceeded its previous highs reached during 2018 to reach record territory. It's the only major market that can make that claim. But its chart is starting to look vulnerable. The S&P 500 fell -3.10% this week and closed just below its 10-week moving average (blue line). But it remains well above its (red) 40-week line. There are three things on Chart 1 that are concerning. First is the fact that its 9-week RSI line (top chart) shows its July peak falling short of its April peak (down arrow), which forms a potential negative divergencefrom its price bars that hit a July high. The second warning is coming from its weekly histogram bars in the middle box. Although the two weekly MACD lines remain positive, their histogram bars have been dropping since April (see falling trendline). That means the spread between the two lines is narrowing, which often precedes a negative crossing. That potential loss of upside momentum is coming at a bad time.
TRENDLINE RESISTANCE...The third warning sign is coming from the rising trendline drawn over its highs formed in January and September of last year and this July. That trendline presents a potential barrier to the market's advance. Which makes the SPX more vulnerable to a deeper pullback. A bigger threat may be coming from a global index that includes foreign markets.
ALL WORLD INDEX IS STILL TESTING ITS OLD HIGH...The weekly bars in Chart 2 plot the MSCI All Country World Index iShares (ACWI). It includes foreign developed and emerging stocks along with the U.S. Slightly more than half of the ACWI is U.S. stocks (56%); foreign stocks account for the rest which accounts for its slightly weaker look. The two upper indicators in Chart 2 show the same negative divergences seen in Chart 1. And it fell further below its (blue) 10-week average. What makes Chart 2 more potentially dangerous, however, is that its price is backing off from its previous peak formed at the start of 2018 (see circles). Any challenge of such a prominent peak presents an important test for a market's ongoing uptrend. And raises the odds for a rally failure. Or a deeper pullback. The fact that the ACWI has yet to hit a new high may also put the record high in the U.S. in jeopardy.
FOREIGN STOCK INDEX IS MUCH WEAKER...I showed this next chart a week ago with the same lines. And it's gotten even weaker. The weekly bars in Chart 3 plot the MSCI All Country World Index ex US iShares (ACWX). And it paints a much weaker picture than Charts 1 and 2. Chart 3 shows what the rest of the world's developed and emerging stock markets have been doing with no help from the U.S. And it's not an impressive picture. It fell slightly more than the other two this past week (-3.3%); and fell further below its blue 10-week average. What's most striking, however, is that foreign stocks have managed to regain less than two-thirds of their 2018 losses. The three horizontal lines plot Fibonacci retracement levels measured from the early 2018 peak to its late 2018 bottom. And it shows the ACWX backing off from upper red line which marks the 62% retracement level of last year's decline. Chart readers know that the 62% line often acts as a resistance barrier. And it appears to be doing just that. The blue down arrow also shows the ACWX backing off from two peaks formed during the second half of 2018.
THE U.S. NEEDS THE REST OF THE WORLD...Although the U.S. stock market is the strongest in the world, and the only one to exceed its 2018 highs, it still needs help from the rest of the world to maintain that uptrend. It's one thing for foreign stocks to lag behind the U.S. which they've been doing all year. It's another thing for them to start to weaken, which many of them did this week. Especially in Asia and Europe. Weaker foreign stocks could create a dangerous divergence between them and the U.S. We've already seen falling foreign interest rates and weak foreign currencies having a depressing effect on Treasury yields, while boosting the dollar and pushing commodity inflation lower. All of those global trends are highly correlated. So are global stock trends. Which is why U.S. stocks may be subject to the same global contagion coming from weaker foreign stocks and their economies. If foreign economies weaken, who is going to buy our exports which are already starting to drop. We need help from them as much as they need us. And the three charts shown today suggest that the global stock rally may be about to undergo an important test, including the U.S. And if it's true that "a chain is only as strong as its weakest link", the deciding factor may be what happens outside of the U.S.
