GLOBAL STOCKS WERE DUE FOR A PULLBACK -- THE CORONAVIRUS IN CHINA IS JUST THE CATALYST FOR AN OVERDUE GLOBAL CORRECTION
GLOBAL STOCKS WERE ALREADY STRETCHED TOO FAR...The coronavirus outbreak in China has rattled global markets all over the world, and rightly so. Fears of an economic slowdown in the world's second biggest economy is something to be concerned about. And market reactions certainly suggest that investors are taking that seriously. That can be seen not just in the selling of stocks; but especially in stocks with closer ties to China. Like Asia and the Pacific Rim. Also stocks tied to travel and tourism like airlines, cruise lines, gaming, and hotels have been hit especially hard. In addition, the selling of economically-sensitive commodities like copper and crude oil which are closely tied to global growth; especially given the fact that China is the world's biggest buyer of those commodities. And in the flight to the safety of government bonds which has pushed the 10-Year Treasury yield to the lowest level in nearly four months. And the buying of safe haven gold which has risen to the highest level in nearly seven years.
AND VULNERABLE TO ANY BAD NEWS... All of those market moves, which have been described in these messages over the past couple of weeks, are normal reactions to that global threat. But market moves don't normally take place in a vacuum. How markets react to outside events often depends on their technical condition at the time of the threat. And that's what this message is all about. And that message is that global stocks were already stretched too far to the upside, and were up against some formidable resistance barriers. And that combination made them vulnerable to any bad news, including the threat from the coronavirus. Let's look at some charts that have been giving early warning signs.
ALL COUNTRY WORLD ISHARES WERE TOO OVERBOUGHT... The weekly bars in Chart 1 show the MSCI All Country World iShares (ACWI) achieving a major bullish breakout last October to resume its major uptrend. The top box, however, shows its 14-week RSI line moving into overbought territory over 70 for the first time since early 2018. It has now fallen back below the 70 line which hints at more weakness. In addition, the middle box shows its weekly MACD lines also approaching their early 2018 high which is another potential warning of overhead resistance. Judging from this past week's drop in its green MACD histogram bars (which measure the spread between the two lines), it wouldn't take much to turn those weekly MACD lines negative.
10-WEEK MOVING AVERAGE BROKEN... Chart 1 also shows the ACWI falling below its 10-week moving average this week (blue circle) which suggests that a correction has already begun. The good news is that its major trend is still up, and there's potential chart support along its 2018/2019 highs if a correction drops that far. That would also put it closer to its 40-week average (red arrow) which is another potential line of long-term support. Since the ACWI measures the entire globe, it includes U.S stocks which account for most of its recent strength. The rest of the world hasn't been as strong, and may have bigger technical problems to deal with.
FOREIGN STOCKS ARE ALSO UP AGAINST RESISTANCE...The weekly bars in Chart 2 show the MSCI All Country World ex US iShares (ACWX) also backing off from a major overbought reading in its 14-week RSI line; with its weekly MACD lines starting to weaken below their early 2018 highs. As its name implies, the ACWX excludes U.S stocks, and measures the trend of foreign developed and emerging markets. While both foreign groups lost more ground than the U.S. this past week, emerging markets in Asia were the biggest losers. What makes the ACWX even more vulnerable in this chart is the fact that it was approaching major overhead resistance formed at the start of 2018 while in that overbought condition. That's more than enough to make any chartwatcher more cautious.
THIS WEEK'S DOWNTURN... The last weekly bar shows it falling back below its 10-week moving average this past week which signals the likelihood for more selling to come. But there again, the good news may be that there's potential chart support along its earlier 2019 highs (blue line) and its 40-week average (red arrow) if prices drop that far.
STOCKS WERE DUE FOR A PULLBACK ANYWAY... Charts 1 and 2 are designed to show that global stocks had risen too far too fast, were up against some resistance barriers, and were vulnerable to any bad news. The coronavirus provided that bad news. The good news is that the global uptrend is still intact, and well above long-term support levels.
S&P 500 WAS UP AGAINST RESISTANCE OF ITS OWN... Although U.S. stock indexes were all in record territory, they were also up against internal resistance barriers of their own. Technical analysts have tools to determine when a stock index is stretched too far to the upside, and up against some potential resistance. The monthly bars in Chart 3 measure the percent of S&P 500 stocks that are above their 200-day moving average. The main value of that indicator is spotting extremes in either direction. For example, drops near 20% normally mark a deeply oversold market condition. The last time that happened was near the end of 2018 and marked a major bottom.
READINGS OVER 80% ARE OVERBOUGHT... Readings over 80% usually indicate an overbought market. And especially if that overbought level coincides with previous peaks in that indicator. The last monthly bar in Chart 3 shows the indicator dropping sharply during January (from above 80%) after failing a test of previous peaks formed over the previous four years (red circle). That's another indication that U.S. stocks were vulnerable to any bad news that might arise. That's not necessarily a sign of a major market top. But a market in need of a pullback or consolidation of some type. But it does help explain why stocks here and around the world have reacted so nervously to the Chinese virus.
MAINLAND CHINESE STOCKS REOPEN ON MONDAY... As you're probably aware, Chinese mainland stocks were closed this past week for the Lunar New Year holiday. Chinese stocks traded in Hong Kong and U.S. fell sharply, however, as did China-related ETFs traded in the states. Trading in Shanghai and Shenzhen is expected to resume on Monday (February 3). Needless to say, that could lead to a sharply lower open in mainland Chinese stocks when trading resumes as they adjust to the past week's losses. So don't get alarmed if TV commentators report any sharp drops in Chinese stocks at the start of the new month. Hopefully, any short-term disruptions will be quickly corrected.
