GLOBAL STOCK INDEXES LOOK VULNERABLE -- THAT INCLUDES AN OVERBOUGHT S&P 500 -- EAFE ISHARES BACKING OFF FROM 2018 HIGH -- EMERGING MARKETS LOOKING THE WEAKEST -- % S&P 500 STOCKS ABOVE 50-DAY AVERAGE WEAKENS
GLOBAL STOCKS LOOK OVER-EXTENDED AND VULNERABLE... A number of recent messages have shown charts suggesting that the U.S. stock market looks overbought on the upside and vulnerable to some profit-taking. Not necessarily a major top, but a correction of some sort. Foreign stocks look even more vulnerable. And what happens overseas impacts what happens here. Today's message will take longer-term look at three global stock indexes in an attempt to show that all of them look vulnerable from a technical standpoint. Starting with the U.S.
S&P 500 WEEKLY RSI LINE WEAKENS... The weekly bars in Chart 1 show the S&P 500 hitting a new record this week before closing modestly lower. What concerns me is the blue line which plots its 14-week RSI line. First of all, the RSI rose above 70 near the end of last year for the first time since the start of 2018. That put the SPX in the most overbought territory in two years. Secondly, the February RSI peak fell short of its January peak (see blue arrow). Chart readers will see that lower RSI peak as a potential "negative divergence" between it and the record high in the SPX. Similar negative divergences exist on its daily chart. But weekly divergences from overbought territory usually carry a more dangerous message. A measure of foreign developed markets is in an even weaker technical condition.
EAFE ISHARES UP AGAINST MAJOR RESISTANCE...The weekly bars in Chart 2 show MSCI EAFE iShares (EFA) up against major resistance formed at the start of 2018 (blue area). [EAFE stands for Europe Australasia and Far East stock markets]. That's a formidable technical barrier. And its trend appears to be weakening. First of all, its lower February price peak fell short of its January high which shows loss of upside momentum. In addition, its 14-week RSI line overlaid over the price bars is falling from overbought territory over 70 which suggests more weakening. And its weekly MACD lines in the upper box have turned negative for the first time in five months. That combination of weaker indicators make EAFE iShares look more technically vulnerable. Weakness in foreign developed stocks would have a negative impact on the global stock market, which includes the USA. Emerging markets look even worse.
EMERGING MARKETS ISHARES SLIP BELOW SPRING HIGH... The weekly bars in Chart 3 show the January peak in MSCI Emerging Markets iShares (EEM) falling well short of their 2018 peak. The EEM has also fallen below its 10-week moving average (blue line) for the first time in four months; and is threatening its red 40-week line. Even more significant may be the fact that the EEM ended the week below the prior peak formed last April (red trendline). A broken resistance level (prior peak) should act as support on subsequent pullbacks in order to maintain an uptrend. This week's close below that earlier peak puts the EEM uptrend in jeopardy. That wouldn't be good for the global stock market. Asian emerging markets are the most exposed to the coronavirus threat which largely explains their recent weakness. But that casts a cloud over the global economy which is already showing signs of weakening.
FLIGHT TO SAFER DOLLAR... This week's sharp drop in the Japanese yen reflects fears that the world's third biggest economy might be slipping into recession. The flight out of other foreign currencies into the relative safety of the U.S. dollar reflects the same fears of weaker foreign economies. The U.S. economy is more insulated from the coronavirus; but it's not immune. More serious weakness abroad would most likely lead to some weakness here.
S&P 500 PERCENT OF STOCKS ABOVE 50-DAY MA WEAKENS... The previous Friday'smessage showed the percent of S&P 500 stocks above their 200-day moving average falling from overbought territory over 80% which created a potential "negative divergence" between that line and the SPX. That's still the case. The blue line in Chart 4 shows the same situation in the percent of S&P 500 stocks above their 50-day average. The blue down arrow shows a negative divergence between the falling blue line and the SPX bars which hit new highs this month. The blue line reached overbought territory above 80% during January. And has since fallen to less than 60%. That means that more than 40% of stocks in the SPX are trading below their 50-day average. That's another warning that the February record high in the S&P 500 is on shaky technical ground. And increases the odds that it may retest its own 50-day average.
S&P 500 MAY RETEST ITS 50-DAY LINE...The daily bars in Chart 5 show the S&P 500 ending the week under selling pressure. And in heavier downside volume on Thursday and Friday. That's not a good sign. Neither is the negative divergence in its 14-day RSI line; or a similar divergence in its daily MACD lines which turned negative on Friday. All of which suggests that the SPX is vulnerable to a deeper pullback. If that happens, its first downside target would most likely be its 50-day average (blue arrow); or possibly even its January low. That would be the first real test of the market's 2020 uptrend. This week's aggressive buying of Treasury bonds and gold (along with consumer staples, utilities, and REITS) suggests that that investors are buying defensive insurance in case that stock uptrend undergoes more serious selling. This week's three-year high in the U.S. Dollar Index may also create some headwinds for large multinationals in the S&P 500 by making their exports more expensive to foreign buyers.
