CRB BREAKDOWN HURTS STOCKS ... Last Tueday's message showed the CRB Index in the process of testing its lows formed during the second half of 2011, and warned that commodity weakness was starting to hurt stock values. Since then, the CRB has plunged to the lowest level in 20 months. At the same time, the S&P 500 has violated its spring low. I believe those two events are related. Chart 1 compares the CRB Index (brown bars) to the S&P 500 (blue line) since the start of 2011. Notice the similarities between what's happening now and what happened last spring. The CRB Index peaked peaked in late April and tumbled during May (first brown arrow). The S&P 500 peaked three months later during July and tumbled during August (first blue arrow). This year, the CRB peaked at the end of February and tumbled during March. The S&P 500 peaked three months later during May. Both are breaking support levels at the same time. Commodity weakness signals global economic weakness which is bad for stocks. Commodities are being hurt by a rising dollar. That's also bad for stocks, but is worse for foreign shares.
DOLLAR SURGES AS EURO TUMBLES... Money continues to flow from the Euro into the U.S. Dollar. Chart 2 shows the DB Bullish Dollar Index Fund (UUP) climbing above its March high to the highest level in four months. Upside volume is strong. At the same time, Chart 3 shows the Euro tumbling nearly 1% to the lowest level in four months. Downside volume has been heavy. There's good and bad news in that for U.S. stocks. The bad news is that contagion from falling foreign stocks is pulling U.S. stocks lower. The good news is that U.S. stocks are holding up better than foreign stocks.
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
FOREIGN SHARES FALL MUCH FASTER THAN U.S.... Last Thursday's message also explained that a rising dollar hurts foreign shares more than those in the U.S. The next three charts show that happening. Chart 4 shows the S&P 500 falling below its April low to turn its short-term trend lower. The next important test of support is the October high which is marked by the flat support line. In chart work, a previous peak should provide support on subsequent corrections. That's why the line turns from red to green. That would also put the S&P near its 200-day average (red line). Unfortunately, foreign stocks have already fallen below both support lines. Chart 5 shows EAFE iShares (EFA) falling to the lowest level in four months and well below its 200-day average (red circle). The solid gray line represents the Euro. The falling Euro since the start of May has been a big reason why the EAFE (which has a heavy European weighting) is falling so hard. Chart 6 shows Emerging Market iShares (EEM) also trading at a four month low and below its 200-day line. The solid gray line in Chart 6 is the WisdomTree Emerging Currency Fund (CEW) . Notice that both lines are falling together. That shows loss of confidence in most foreign currencies and their shares. When that happens, most of that money moves into the U.S. dollar and Treasuries.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
GOOD AND BAD NEWS... Global stocks are highly correlated. Weakness overseas usually means weakness here. Chart 7 compares the stronger trend in the S&P 500 (blue line) to a weaker trend in the Vanguard FTSE All World Ex US Stock index (VEU) . [The VEU (red line) includes foreign developed and emerging markets with a 25% European weight]. The fact that the foreign stock index has already broken important support levels suggests the possibility of a retest of its 2011 lows. That degree of weakness would undoubtedly hurt U.S. stocks. That's the bad news. The good news is U.S. stocks should lose less ground than foreign shares. That's due to the rising dollar. The rising blue line in Chart 8 is a "ratio" of the S&P 500 divided by the VEU since the start of 2011. That rising ratio shows that U.S. stocks have been stronger than foreign stocks over the last year. The green line is the Dollar Index. Notice that both lines have been rising together. U.S. stocks also get hurt by a rising dollar. But foreign shares get hurt more. Over the past year, the S&P 500 has gained 5%. By contrast, emerging shares have fallen -17% and EAFE iShares -12%. The VEU (which includes both categories) has lost -13%. That's makes the U.S. assets the safest place to be at the moment. That's especially true with the dollar and Treasuries. But it's also true with stocks.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
