Are US Markets Following China's Weakness?
If so, the S&P 500 is about two weeks from reaching its high.
- Morning stock market gains were erased by the time the FOMC decision was released. Following the Fed's decision, stocks rallied to make new daily highs (see below chart).
- Bonds also gained, and the benchmark 10-year Treasury closed at a yield of 3.65%, down five basis points.
- The dollar did not fare well. The DXY gave up Monday's gains and closed below its 3.5-month uptrend line.
- While dollar weakness gave a boost to oil and gold, more interesting was the inability of the PowerShares DB Commodity Index Tracking (DBC) to make a new high in the afternoon.
- Add all this up and you have currency, commodity, and debt markets concerned about the vitality of the economic recovery, while stocks continue to float on air.
Click to enlarge
Market Internals: NASDAQ
(Figures are rounded)
A stronger dollar has been a boon to the smaller growth stocks of NASDAQ and the Russell 2000; meanwhile, international markets have lagged and China has slumped
Click to enlarge
International and emerging markets haven't fared as well as US equity markets of late. While the Russell 2000, NASDAQ, and, most recently, the S&P 500 have all made new 52-week highs, many foreign markets have lagged. Price appreciation in the shares of smaller growth companies is quite characteristic of the early stages of an economic recovery, as smaller companies are faster, leaner, more agile, and devoid of debt. They're typically first to experience revenue and earnings growth as the economy rebounds. A strengthening dollar only serves to widen the performance gap between smaller and larger companies. Large-cap, multinational companies are negatively impacted in two ways. First, when they convert foreign currencies (from international sales) to dollars; and second, as they face stiffer price competition from imports (cheaper due to the stronger dollar).
Maybe this is why the S&P took a bit longer to make a new 52-week high and the Dow has failed to do so. This relative outperformance by the Russell 2000 and NASDAQ should continue as long as a US recovery is on track. If the recovery appears unsustainable or is derailed, expect the more defensive names found in the Dow and, more broadly, the S&P to gain favor.
International markets have fallen in line behind US leadership. This is somewhat surprising given the seemingly unanimous belief that faster growth can be found abroad. Perhaps this is a sign of just how dubious this recovery is. Many foreign economies are still closely linked to the performance of the American economy.
China's leading the US? We may find out in two weeks!
Click to enlarge
More surprising, and possibly more telling, is the notably weak Chinese market. The iShares FTSE/Xinhua China 25 Index (FXI) is down more than 11% since peaking in mid-November and is in a clear downtrend. To be fair, FXI doubled off its October 2008 low before this recent retreat. But, downtrends are downtrends until they're broken. And take note of the timing of FXI's bottom and top, and the duration from trough to peak (see above chart). Its low came in October 2008, four and a half months before the S&P bottomed. Its recent high -- November 2009 -- was four months ago. Will the S&P follow suit in a couple of weeks and begin to trade lower? The FXI's move higher lasted nearly 13 months; the S&P is now 12.5 months into its bull run. Again, will US markets begin to follow China's lead in the next two weeks?
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter