ChartWatchers

Watching for a Spring Top

Last December 14 I wrote a message warning of the likelihood of a market correction during 2014. Midterm election years are the most dangerous of the four-year presidential cycle. ["The Four Year Presidential Cycle Suggests That 2014 Could Suffer a Major Downside Correction...The Strongest Six Month Period Ends in April"]. The message points out that midterm year peaks usually start in the spring. Since April ends the "strongest six month period" that starts in November, that makes April a good time to take some money off the table. It may also make the "sell in May" maxim more meaningful this year. The good news is that a major bottom usually takes place during the second half of the year (usually in October). Calendar-wise, we've now entered the dangerous spring season. That makes warning signs of a possible market top more meaningful. The monthly bars in Chart 1 show the S&P 500 rising above its 2007/2000 highs last spring to register a major bullish breakout. Those two prior peaks should act as major support below the market. Measuring from this week's intra-day high to the 2007 intra-day peak at 1576, an S&P 500 drop of 17% would bring it back to that major support level. That's probably the maximum correction we can expect. The red line shows the last two 17% corrections taking place during 2010 and 2011 (the 2011 correction of 19% lasted from May to October). The moral of the chart is that a correction as big as 17% would not disturb the market's major uptrend, and would most likely represent a major buying opportunity later this year.

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A LOOK AT RECENT S&P 500 CORRECTIONS... Chart 2 shows the last 10% correction in the S&P 500 (using intra-day prices) taking place in the spring of 2012 (during April and May). Two years without a 10% correction is unusual. A correction of 8% took place in the autumn of 2012, and a smaller 7% drop in the spring of 2013 (during May and June). An even smaller pullback of 6% took place this January. An S&P 500 drop to its early 2014 February low near 1740 would represent an 8% correction (see first support line). That's probably the minimum correction we can expect this year.

U.S. Stocks Have a Bad Week

My Wednesday message warned that the Dow Industrials could run into profit-taking near its January highs, and that weekly indicators for the S&P 500 were giving "negative divergences" which also warned of a market pullback. Combined with increased tensions in the Ukraine and increased concerns about problems in the Chinese economy, it was no surprise then to see the markets fall sharply later in the week. And some short-term technical damage was done. Chart 1 shows the Dow Industrials falling below its 50-day average (on rising volume). At the same time, the 14-day RSI line (above chart) slipped below 50. More importantly, daily MACD lines (below chart) turned negative for the first time since early January. I wouldn't be surprised to see the Dow retest its 200-day average and/or its February low. Chart 2 shows the S&P 500 falling back below its January high (also on higher volume) and threatening its 50-day line. Daily MACD lines turned down as well. [As shown on Wednesday, weekly S&P 500 MACD lines have been negative since January which makes this week's downturn potentially more serious].

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Schlumberger and Halliburton Lead Oil Service Rally

The two biggest stocks in the OIH also happen to be two of the strongest. The weekly bars in Chart 4 show Schlumberger (SLB) nearing a test of its fourth quarter high near 94. A close above that level would put the oil service leader at the highest level in six years. The SLB/SPX relative ratio (above chart) is also starting to rise for the first time since 2011 (when crude oil started to weaken). Halliburton (the second biggest OIH stock) has an even stronger pattern. Chart 5 shows Halliburton (HAL) ending February at a new record high after clearing previous peaks formed during 2013 and 2011. Its relative strength line (above chart) shows a nice uptick during the first two months of 2014. No doubt, rising oil prices have a lot to do with the stronger performance of both stocks.

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WEEKLY MACD LINES ARE STILL NEGATIVE

The daily MACD for QQQ, SPY and DIA have turned positive. Weekly MACD lines, however, are still negative. That's not unusual since weekly lines are slower to turn. Weekly lines, however, measure the stock market's longer trend. A strong stock market rally requires the weekly lines to turn positive as well. Chart 7 overlays weekly MACD lines on the S&P 500 over the last two years. The red bars along the bottom are MACD histogram bars which measure the spread between the red and blue lines. The histogram bars revolve above and below a zero line, and show us whether the two MACD lines are positive or negative. At the moment, they're negative. The chart shows the performance of the MACD lines (and histogram) during three previous market corrections. [I'm not counting the minor MACD upturn last July (circle) since the lines resumed falling]. In all three instances, positive turns in the MACD lines (and histogram) confirmed resumption of the market uptrend. The green lines showed that it usually took several weeks for that to happen. But that positive turn confirmed that the stock rally had staying power. One other thing. The yearend top in the two MACD lines ended at the same level as last May (while prices kept rising). That "double top" in the MACD line represents a possible "negative divergence" with the S&P 500. That makes me suspicious of the staying power of the stock market rally from here. It also reinforces my view that the market may run into bigger trouble as we approach the spring months.

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% NYSE STOCK OVER 200-DAY AVERAGE ISN'T KEEPING PACE ... Here's another reason why I'm suspicious of the strength of any market upturn from here. Although the stock market is within a few percentage points of a record high, only two-thirds of stocks on the NYSE are trading above their 200-day averages. The red line in Chart 8 plots the % of NYSE stocks over their 200-day averages ($NYA200R) relative to the S&P 500 since 2007. [The percentage scale is on the left side of the chart]. The two lines generally trend in the same direction, but not at the same pace. During the upsurge in 2009, the red line went from below 20% at the start of the year to 90% by the end. That reflected a dramatic turn in the market for the better. Readings in the red line over 80% generally reflect an overbought market. Subsequent drops below 70% have usually coincided with downturns in the SPX (2010, 2011, and twice in 2012). Which brings us to the present situation. At the start of 2013, 83% of NYSE stocks were trading over their 200-day averages. At the moment, only 67% are in that bullish position. While the S&P 500 rose 27% over the last year, the participation rate of NYSE stocks in that uptrend dropped by 16%. The falling trendline over the past year shows that bull market participation by individual NYSE stocks has lagged behind the rising market index by a noticeable amount. In my view, that suggests that any stock market rally between now and the spring will be on shaky technical grounds.

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Utilities and Reits Show Relative Strength

An early January message (January 11) talked about the need to do some rotating out of over-extended stock market groups that did especially well during 2013 into more defensive (and dividend-paying) groups that had been market laggards. The two I mentioned were utilities and REITs. I mentioned those two groups for two reasons. One was that they are defensive in nature, and usually hold up better when stocks weaken. The other is because both groups are closely tied to the direction of bond prices. With bond prices rising throughout the month (as stocks fell), those two groups have done especially well. Chart 1 shows the Utilities Sector SPDR (XLU) moving up to challenge its November high. Its relative strength ratio (gray area) has surged as well. [Dividend-paying stocks also do better when bond yields decline, as they did during January]. Chart 2 shows the Dow Jones Wilshire REIT ETF (RWR) also climbing during the month. Its relative strength line has risen as well. The RWR is nearing a test of its 200-day moving average. Homebuilders also had a strong week and a strong January.

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Plunge in Emerging Markets Causes Global Downturn in Stocks

My Wednesday message showed the close correlation between weak emerging market currencies and emerging market stocks. It showed the WisdomTree Emerging Currency Fund (CEW) threatening to break an important support line. The green line in Chart 1 shows that happening. After falling sharply on Thursday and Friday, the CEW closed just below its 2012/2013 lows. While all emerging currencies tumbled, the most notable collapses took place in Turkey and South America. Argentina and Venezuela were hit especially hard, with the latter suffering a de facto currency devaluation. Why that poses a problem is because a close linkage exists between emerging market stocks and currencies (as well as bonds). Chart 1 shows that Emerging Market iShares (red line) track very close with emerging currencies. The 6-month Correlation Coefficient (below chart) has a positive correlation of .79. Emerging market bonds denominated in local currencies also fell sharply. The subsequent plunge in emerging market assets caused a high-volume selloff in developed stock markets all over the world and a flight to quality into American, German, and Japanese government bonds. Gold prices also jumped. Although the U.S. dollar bounced on Friday, most currency money went into Europe and Japan. A jump in the Japanese yen pushed Japanese stocks sharply lower.

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DROP IN CHINESE STOCKS DIDN'T HELP ... My Wednesday message suggested that emerging markets needed a stronger Chinese stock market to recover from their current slump. Unfortunately, they didn't get that help. Chart 2 shows China iShares (FXI) plunging nearly 5% on the week. In so doing, the FXI tumbled to a five-month low and ended below its 200-day moving average. News that China's manufacturing sector had slipped into a contraction mode had an especially negative effect on emerging markets that export to China (mainly in Asia and Latin America). China is the world's biggest emerging market and the world's second largest economy. What happens to that economy and stock market has a big effect on markets everywhere else.

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Bond Yield Plunges on Weak Jobs Report

Friday's news that American employers added only 74,000 jobs in December didn't have much of an effect on the broader stock market, but did shock bond investors. Chart 1 shows the 10-Year Treasury Note Yield ($TNX) suffering the worst drop since September. In so doing, the yield fell back below its early September peak just below 3%. Friday's plunge kept bond yields within its second half trading range between 3% on the upside and 2.5% on the downside. Bond prices jumped sharply as yields fell. Stocks tied to bonds also had a strong day. They include bond proxies like utilities and REITS. Homebuilders also had a strong day, as did dividend-paying stocks. So did gold and other precious metals. All had been hurt during 2013 by rising bond yields. Friday's action may have been an over-reaction to one month's report (most likely influenced by bad December weather). Portfolio rebalancing may have also played a role. One of the time-honored practices is to "rebalance" one's portfolio at the start of a new year. That involves moving some funds out of the previous year's winners (like stocks) and into the biggest losers (which are bonds). Some money managers are suggesting, however, that some money earmarked for bonds might be better placed in stock categories tied to bonds. The reasoning is that "bond proxies" offer the possibility of capital appreciation if stocks continue to rally. Since those groups were underperformers during 2013, they may offer better value at current levels, and some protection against an over-extended stock market that is entering a dangerous year.

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RECAP OF 2014 FORECAST ... My December 14 message described a likely scenario for the presidential cycle to play out during 2014 which I'll summarize here. According to the Stock Traders Almanac, the second year of a presidential cycle (2014) is usually the most dangerous. The historical tendency is for the midterm election year to experience a correction (in the 15-20% range) between April and October. That usually leads to a major buying opportunity which most often leads to a stronger market the following year. I also pointed, however, that January and April were two of the best months to consider taking some profits (or rotate into more defensive sectors). January ends the best "three-month span" of the year that started in November. April ends the "best six-month span" that also starts in November. Of those two months, April is the more significant. Given that scenario, and following this week's market action, it may not be too early to start doing some "re-balancing" away from aggressive stock holdings that had a strong 2013 into more defensive stocks categories that pay dividends and that have lagged behind the market. Those groups include utilities, REITS (and especially homebuilders). That more defensive strategy may become more urgent if the market holds up through April. This may be one year where the "sell in May" strategy carries a lot more meaning.

Possible Upside Target for 10-Year Bond Yield is 3.75%

Wednesday's Fed announcement that it would finally begin a modest tapering of bond purchases in January gave a slight boost to bond yields during the second half of the week. The daily bars in Chart 1 show the 10-Year Treasury Note Yield (TNX) backing off Friday from its September peak near 3%. Bond yields had already risen since October in anticipation of a possible Fed move. This week's muted reaction in bond yields, however, doesn't diminish odds that bond yields will probably be heading higher during 2014. That's due partially to reduced bond purchases. But it's also due to improving economic conditions. A higher-than-expected third quarter GDP of 4.1% is the highest in nearly two years and confirms other signs of an economic rebound (like a five-year high in housing starts). What's a realistic upside target for bond yields in 2014? The weekly bars in Chart 2 show the 10-year yield having broken a six-year down trendline. Standard chart analysis suggests a possible upside target to 3.75% which is the high reached in early 2011. The pledge by the Fed to keep short-term rates down also reassured stock investors and put a limit on how high bond yields can go. My November 23 message on the yield curve relied on that pledge in arriving at an upside target for the 10-year yield: "That makes 3.75% a realistic upside target for 2014, if the Fed keeps short-term rates near zero".

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Stocks Bounce Off Chart Support

Friday's announcement that U.S. payrolls rose by 203,000 during November with the unemployment rate falling to 7% (the lowest level in five years) topped a week of encouraging economic news. Stocks rose strongly on that report, which suggests that good news is finally being recognized as good news. Recently, it seemed like every sign of economic strength raised concerns that it increased the odds for earlier Fed "tapering" of its monthly bond purchases which would push bond yields higher. Bond yields did jump initially on Friday before ending unchanged on the day. It should be remembered, however, that bond yield had already gained twelve basis points during the week. The fact that bond yields weakened yesterday afternoon no doubt encouraged stock bulls. There seems little doubt that bond yields will climb higher next year. The good news, however, is that they'll be climbing for the right reasons -- stronger economic growth with little or no inflation. Friday's rally appears to have ended the recent pullback. Chart 1 shows the Dow Industrials climbing 198 points (1.26%), and did so well above chart support drawn along its September peak. The only thing missing was higher volume. Chart 2 shows the S&P 500 climbing 20 points (1.12%). The SPX bounced off initial chart support at its mid-November intra-day low at 1777. Its 14-day RSI line (above chart) bounced off 50 which is good. Its daily MACD lines improved on the day, but remain negative. They will need to turn positive to confirm resumption of the uptrend. As I suggested earlier in the week, the market usually ends the month of December on a strong note (the Santa Claus rally). Odds of that happening this year now look a lot better.

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The Great Rotation is Well Underway

There's a positive side effect to rising bond yields. When bond yields rise, bond prices fall. When bond prices fall, investors start moving money into stocks. That sequence supports the view that higher bond yields are already causing a generational shift in favor of stocks. Chart 1 plots a "ratio" of the S&P 500 divided by the price of the 30-Year T-bond. [A ratio is created by inserting a colon (:) between the two symbols ($SPX:$USB)]. The rising ratio between 1980 and 2000 favored stocks over bonds. The last decade favored bonds over stocks. Until now. The ratio actually bottomed during 2009. To the upper right, however, you can the stock/bond ratio exceeding its upper "channel line" drawn over its 2000/2007 (circle). That suggests that a generational shift is taking place in favor of stocks over bonds. In other words, the "great rotation" out of bonds and into stocks is well underway.

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OVERBOUGHT READINGS IN A SECULAR BULL AREN'T AS RELIABLE... Momentum oscillators tell us whether the stock market is overbought or oversold. But they have to be kept in perspective. During a secular bull market (a long term uptrend), the market can stay overbought for long periods of time. Chart 2 applies the 14-month RSI (red) line to the S&P 500 since 1980. The market reached overbought territory several times during the secular bull market between 1982 and 2000 and stayed there for years. The RSI line remained overbought during 1985 and 1986 as the market rose. During 1987, a major "negative divergence" in the RSI line (falling trendline) warned of a dangerous market condition which led to major stock selloff. [A negative divergence is present when the oscillator forms lower peaks while stocks are rising]. The RSI line also stayed overbought between 1995 and 1999 as the market rose. It took another major "negative divergence" during 2000 (falling trendline) to warn of a possible market top. During a secular bear market, which began in 2000, oscillators become more useful. Major oversold conditions in the RSI (below 30) during 2002 and early 2009 suggested major market bottoms. An overbought reading during 2007 led to a major market collapse. The circle to the upper right, however, shows the S&P 500 breaking out of its decade-long trading range which signals the start of a new secular bull market in stocks. In that environment, overbought oscillator readings are less relevant. First of all, the current RSI reading (while overbought) is still well below overbought levels reached during 2007, the late 1990s, and 1987. Secondly, there's no sign of a negative divergence. That doesn't mean that the market is immune from a downside correction (which is more likely during 2014 than this year). It does means, however, that overbought readings are less meaningful in a secular bull market. In a secular bull market (like the one we're currently in), the stock market can get overbought and stay there for a long time.

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Bond Bounce is up Against Charts Resistance and Looks Overbought

After selling off sharply between May and September, bond prices have been bouncing for the last two months. The bounce, however, has reached technical levels that may cap the rally. Chart 1 shows the 7-10 Year T Bond iShares (IEF) having retraced 50% of its previous downtrend. In addition, the IEF is up against its 200-day moving average. The green line above the chart also shows the 14-day RSI line having reached overbought territory at 70 for the first time since April. Chart 2 shows a similar trend for the iBoxx Investment Grade Corporate Bond iShares (LQD). Chart 2 shows that the LQD has reached potential chart resistance formed earlier in the year. Notice that the horizontal line drawn below the first quarter lows turned from green to red. That's because a broken "support" level becomes a new "resistance" level after it's broken. Its 14-day RSI line has also reached overbought territory at 70 (down arrows).

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U.S. Dollar Index Falls to Two-Year Low

The U.S. dollar continues to weaken. Chart 1 shows the PowerShares US Dollar Bullish Fund (UUP) falling to the lowest level since the third quarter of 2011. One of the side-effects of a falling dollar is that it gives a boost to gold. And it's doing just that. Chart 2 shows the SPDR Gold Trust (GLD) gapping 3% higher today. In so doing, it is rising above a falling trendline drawn drawn over its August/September peaks. The 14-day RSI line (top of chart) is about to rise above 50 for the first time in two months. And the daily MACD lines (bottom of chart) appear poised to turn positive for the first time since August. Gold stocks are also rallying today along with other stocks tied to commodity prices.

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U.S. Stocks Weaken Versus Foreign Stocks

My last message discussed how money was starting to rotate out of an over-extended U.S. stock market into foreign stocks which are trying to catch up to the U.S. market. This message will build on that theme by using ratio (or relative strength analysis). Chart 1 plots a ratio of the S&P 500 versus the EAFE iShares (EFA) over the last year. The EAFE represents developed foreign stocks in Europe, Australasis, and the Far East. After rising between January and June, the U.S./EAFE ratio peaked in July and has fallen since then. [The peak in the ratio coincided with peak in the U.S. dollar and a rally in foreign currencies, especially in Europe]. The ratio has also broken a rising support line drawn under its January/ May lows. That shows that the asset allocation pendulum has swung to foreign developed markets. We see a similar pattern in emerging markets. Chart 2 shows a ratio of the S&P 500 divided by Emerging Market iShares (EEM) having also broken a rising trendline going back to January. That suggests that some money is also rotating from the U.S. into riskier emerging markets.

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Rate Sensitive Stocks Surge on Bond Rally

The Fed surprised everyone yesterday by deciding not to start its widely anticipated tapering of bond purchases. Although that decision was a surprise, market reactions weren't. In fact, each market did pretty much was one would expect. Bond yields tumbled and bond prices soared. Stocks surged around the world. The dollar plunged along with bond yields which pushed gold and other commodities higher. Foreign stocks surged, especially in emerging markets, which had been hit especially hard by rising U.S. bond yields and a stronger dollar (more on that later). Within market sectors, yesterday's biggest gainers were rate-senitive stock groups that had been weakened by rising bond yields since May -- including homebuilders, REITS, and utilities. Chart 1 shows the Utilities Sector SPDR (XLU) surging nearly 3% yesterday to end back above both moving average lines. The gray areas shows the XLU/SPX ratio falling since the start of May. That's when bond yields started to surge and bond prices collapsed (green line). Yesterday's collapse in bond yields, and bond price rally, turned those trends around. Chart 2 shows the Dow Jones REIT Fund (RWR) surging 3.5% on rising volume. Chart 3 shows the Dow Jones U.S. Home Construction iShares (ITB) jumping nearly 5% on rising volume.

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Bond Yield Reaches New Two-Year High

The weekly bars in Chart 1 show the 10-Year Treasury Note Yield ($TNX) reaching a new two-year high today and very close to breaching the psychologally important 3% barrier for the first time since early 2011. The TNX has also cleared a five-year resistance line extending back to 2007 (see circle). That leaves little doubt that bond yields are headed higher, and bond prices lower. Chartwise, the next potential upside targets are 3.22% (which is a minor peak formed during summer 2011) and 3.74% (which is a more prominent peak formed in early 2011). I've expressed the view that rising bond yields are a positive sign because it suggests more economic optimism. One way to measure that more bullish sentiment is to compare the recent performance of ecomically-sensitive stocks to more defensive consumer stocks.

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Bond Yield Resumes Uptrend

The uptrend that started in bond yields during May is resuming. Chart 1 shows the 10-Year Treasury Note Yield ($TNX) hitting a new recovery high today. That resumes the uptrend in bond yields. The weekly bars in Chart 2 show that the TNX is now trading at the highest level in two years. That confirms the upside breakout in the TNX that occurred during June when it exceeded its early 2012 high (see circle). The monthly bars in Chart 3 show the TNX also testing a falling resistance line extending back to its 2007 peak. A decisive close above that falling trendline would leave little doubt (if any still exists) that bond yields have bottomed and that the thirty-year bull market in bond prices has ended. That's bad news for bond prices that fall when yields rise. To the extent that rising bond yields are discounting an improving economy, that should be good for stocks over the long term. Over the short run, however, the jump in bond yields (and more talk of Fed tapering) is causing profit-taking in an overextended stock market.

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Dow Transports Confirm New Record in the Industrials

The Dow Industrials and Transports are hitting new record highs together once again. That's a sign of an ongoing bull market. [Dow Theory holds that an upside breakout in either one needs to be confirmed by a similar breakout in the other]. Chart 1 shows the Dow Industrials trading at a new record today. Today's action in the transports is even more impressive. Chart 2 shows the Dow Transports climbing 3% to also trade at a new record. The upside action in the transports is also encouraging, since they're considered to be an economically-sensitive stock group. That's especially true of air freight, rails, and trucks. Today's upside leadership is coming mostly from truckers.

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Crude Oil Reaches 15-Month High

Chart 1 shows Light Crude Oil trading at the highest level in fifteen months. My July 5 message showed crude oil trading higher in an attempt to close the gap between it and higher priced brent crude. As of today, crude is only a dollar away from its European counterpart. With oil prices on the rise, investors appear to be showing new interest in energy stocks. My July 8 message showed the Market Vectors Oil Services ETF (OIH) moving up toward its 2013 highs. Chart 2 show the OIH very close to challenging its May peak. Its relative strength ratio (gray area) has also started to climb since June. That same message showed upside breakouts in Baker Hughes (BHI) and National OIlwell Varco (NOV). Today's upside breakout belongs to Schlumberger (SLB). Chart 3 shows SLB trading over its spring high with a rising relative strength ratio. SLB is also the largest holding in the OIH.

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WTI CRUDE IS CATCHING UP TO BRENT

The price of West Texas Intermediate Crude oil (the U.S. benchmark) has exploded over the last week. The lower line in the chart below shows the August light crude oil contract having broken out to the highest level in 14 months. Today's rise puts August crude at 103.12, which is $4.34 below the price of European brent crude (which ended at 107.46). Both varieties of crude usually trade around the same price. U.S. crude has been much weaker than brent over the last two years, owing to supply bottlenecks in the the U.S. With those having been relieved, the U.S. oil market is catching up to Europe. The upper line in the chart shows the August Brent Crude contract trading at a three-month high. Energy traders are betting that WTI crude will catch up to the price of Brent and close the unusual gap between the two.

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- John

Emerging Market iShares Plunge

The biggest threat to the global stock rally is coming from emerging markets. The weekly bars in the chart below show Emerging Market iShares (EEM) falling to the lowest level in nine months. It has also broken a support line extending back to the fourth quarter of 2011. Emerging market bonds and currencies have also fallen sharply. My June 1 message explained that rising U.S. Treasury yields undercut demand for emerging markets by reducing the appeal of higher-yielding foreign assets. I also expressed concern that weakness in global markets might cause some profit-taking in the U.S. So far, U.S. stocks have shown amazing resilience in the face of foreign selling. That may change, however, if foreign markets don't stabilize soon.

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- John

 

Emerging Market Stocks Fall Hard During May

The main story of the past week has been the upside breakout in U.S. Treasury bond yields to the highest level in thirteen months, and the corresponding drop in bond prices. The jump in bond yields during the month of May contributed to heavy selling of dividend paying stocks -- mainly telecom, utilities, and REITS. The ripple effects of the jump in U.S. bond yields extends to foreign markets as well-- emerging markets in particular. Chart 1 shows Emerging Market iShares (EEM) dropping sharply during May (-3.8%). The biggest emerging market losers during 2013 have been countries tied to commodities. Since the start of 2013, Brazil and Russia (which export commodities) lost -9% and -15% respectively. China (the world's biggest importer of commodities) lost -10%. [The EEM has lost -7% during 2013, while EAFE iShares (developed markets) and the S&P 500 rise 5% and 15% respectively]. During those five months, commodity prices fell -4% while the U.S. Dollar Index gained 4%. The rising dollar has been a side-effect of expectations for higher U.S. rates. While the rest of the world is still easing (or just starting to), expectations are building that the U.S. is tapering its quantitative easing program. The stronger dollar has also had a direct negative effect on emerging market currencies, and an indirect negative impact on emerging market bonds.

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Dollar Index Nears Three-Year High, Plunging Yen Has Hurt Gold

The chart below shows the U.S. Dollar Indexchallenging its mid-2012 high near 84. An upside breakout through that prior peak (which appears likely) would put the dollar at the highest level since mid-2010. The dollar has become the world's strongest currency. One of the reasons for the stronger greenback is the fact that the U.S. economy is now the strongest among developed markets. Another is chatter that the Fed is planning to cut back on bond purchases (quantitative easing) sooner rather than later. That's in contrast to other central bankers who are accelerating their easing process. Japan is the biggest example of that. But the weaker yen has forced the South Koreans to lower rates to weaken their currency (the won). [A plunging yen has pushed money into the higher yielding won which hurts South Korean exports that compete with Japan]. Europe has lowered rates to combat the longest recession in the postwar era. Australia has lowered rates to combat the deflationary impact of falling commodity prices and slowing Chinese demand. [80% of Australia's exports to China are natural resources]. The stronger greenback has a lot of intermarket implicatons for other markets, which include commodities and stocks.

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Subscribers may remember that my Market Message from last December (20) carried the headline: "A Peak in the Yen Appears to be Dragging the Price of Gold Lower". The weekly bars in the following chart show the price of gold peaking during the fourth quarter of last year and tumbling to the lowest level in two years during 2013. The green line shows the U.S. Dollar rising against the yen during that same time span. The upturn in the dollar/yen (green circle) during October coincided exactly with the peak in gold. Since the start of October, the dollar has risen 24% against the yen, while gold has lost -21%. By contrast, the Dollar Index has risen only 5% during those eight months, while the Euro has been flat. That appears to confirm my December view that the plunging yen has been the main driver of falling gold prices, and not the USD which is dominated by the Euro.

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- John

Technology SPDR Resumes Uptrend

Thursday, April 25th I wrote about the technololgy sector being one of the markets weakest groups this year. That may finally be changing for the better. The chart below shows the Technology Sector SPDR (XLK) exceeding its early April high to reach the highest level in six months. The XLK/SPX relative strength ratio (gray area) has also turned up. That's the first sign of upside leadership coming from the technology this year. Thursday's message suggested that an upturn in Apple (the sector's biggest stock) from an oversold condition would be a big help to the sector. It also showed Microsoft (the second biggest stock) breaking out to the upside. Over the past week, both stocks have gained 9% and 7% respectively. Another big teck stock that has turned up is Intel. So have some other semiconductor stocks.

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Copper Plunges To 18-Month Low-- FCX Tumbles With It

Of all the commodity markets, copper is viewed as the most closely aligned with trends in the global economy. Copper and other commodities have been lagging behind global stocks over the past year (largely owing to a stronger dollar and weakness in Chinese stocks). This week's plunge in copper, however, finally caught the world's attention, and not in a good way. Chart 1 shows the price of spot copper plunging this week to the lowest level since October 2011. It had already fallen below the lower line of a long-term "symmetrical triangle" which signaled that its trend was weakening. One of the worst performing stocks is tied to copper. Chart 2 shows Freeport McMoran Copper & Gold (FCX) tumbling to a two-year low this week. Its relative strength line (gray area) had been falling for the past year. [FCX is primarily a copper stock]. The copper breakdown calls into question the strength of the global economy which, in turn, is causing nervous profit-taking in global stock markets.

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Weak Commodities Hurt Producers

This is the same headline used in my March 21 message which showed how falling commodities were hurting stocks of countries that produced commodities. A rising dollar causes foreign stocks to underperform U.S. stocks, which has been the case since the dollar bottomed during 2008. A rising dollar hurts commodity prices. As a result, foreign countries that produce and export commodities take a double hit. The March 21 message showed the close positive correlation between commodity prices and Brazil and Canada. Today, I'm adding Russia to the mix. Chart 1 compares the trend in the CRB Index (bottom line) to Brazil (blue line), Canada (red line), and Russia (green line) iShares since 2009. You can see the visual correlations. All four markets rose together until the spring of 2011. The CRB Index peaked that spring (thanks to a rising dollar), and has continued to weaken. Brazil, Canadian, and Russian stock ETFs peaked at the same time and have continued to weaken along with commodities. Russia's stock market is especially sensitive to trends in energy, which is its biggest export market. Relative weakness in the Chinese stock market (which is the world's biggest importer of commodities) has also hurt demand for commodities and country stocks that produce them.

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