The decline in the U.S. dollar continues. Chart 1 shows the Invesco US Dollar Index (UUP) dropping to the lowest level in two years. Previous messages have described some of the intermarket side-effects of a weaker greenback. One of them is that it's usually good for foreign markets. That also increases demand for foreign currencies. And right on cue measures of foreign stocks are hitting new records.

Chart 1

The daily bars in Chart 2 show the MSCI All Country World Index ex US (ACWX) moving above its January high to a new record. A big part of that recent gain has come over the last month as the dollar started its latest downleg. Foreign stocks are also starting to play catch-up to the U.S. That can be seen by the ACWX/$SPX relative strength ratio in the upper box. The foreign stock/U.S. ratio hit bottom at the start of September; and has since risen to the highest level in four months. And it's not far from a new eight-month high. That's a sign that investors may be rotating some funds from the relative safety of the U.S. and into foreign markets that had been lagging behind. Positive vaccine news may be the driving force behind that foreign rotation as investors become more optimistic on the global economy. Emerging markets have been the biggest beneficiary of the falling dollar. But foreign developed markets are also gaining ground.

Chart 2

Chart 3 shows the MSCI EAFE iShares (EFA) moving above its January high to a new record. [EAFE includes developed stocks in Europe, Australasia and the Far East.] That puts them in sync with the Emerging Markets iShares (EEM) which are also in record territory. A lot has been written recently about the positive rotation in the U.S. into more cyclical parts of the stock market that stand to benefit from a stronger economy next year. The recent rotation into foreign stocks may be sending the same positive message. The fact that foreign stock ETFs are quoted in weaker dollars also gives them an added advantage. More optimism on the global economy and stocks may also be reducing the appeal for the safe haven qualities of the U.S dollar.

Chart 3

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Editor's Note: This is an article that was originally published in John Murphy's Market Message on Friday, November 27th at 2:09pm ET.

Boring and lagging ETFs turned into exciting leaders in November as we saw breakouts in the Regional Bank ETF (KRE) and REIT ETF (IYR). The breakouts are bullish and IYR has a short-term bullish continuation pattern working, but we should not forget about the prior leaders and ETFs with real growth prospects. Today we will cover KRE, IYR and a classic bullish continuation pattern in two tech ETFs.

The first chart shows The Regional Bank ETF peaking just below its falling 200-day in June, forming a long falling wedge and breaking out with a 50+ percent advance the last nine weeks. It is an impressive advance that is clearly bullish, but as MC Hammer would say: Can't Touch This!

The bottom window shows the REIT ETF with a playable setup. The ETF broke out of a long triangle in mid November and the breakout zone turned into support. IYR consolidated the last two weeks and a pennant is taking shape. These are short-term bullish continuation patterns and a breakout at 87 would signal a continuation higher.

Even though banks, energy and other groups captured the market's attention in November, I would not dismiss the prior leaders. Sorry, but I do not see secular growth happening for old school banks, REITs and fossil fuels. Furthermore, we should be interested in an ETF or stock when trading has turned boring and volatility is low, not when excitement and volatility are high.

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The next charts show the Software ETF and Internet ETF hitting 52-week highs in early September and then moving into the boring camp as both traded sideways. Even though they are not leading on the three month timeframe, they are leading on the nine to twelve month timeframes. In fact, note that KRE and IYR are still down year-to-date, and FDN hit a new high this week.

After a massive advance from late March to early September, IGV and FDN were entitled to a rest. The consolidation over the last three months provided the pause that refreshes and allowed the ETFs to digest their big gains. Moreover, both formed a classic bullish continuation pattern: Ascending Triangle. Breakouts would confirm these patterns and signal a continuation of their existing uptrends.

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The charts continue to roast the bears. It's been an aggressive run; they are hanging on, but it seems they are getting knocked off every perch. The Nasdaq even joined the party on Wednesday, finishing up on a down day for the Dow and $SPX.

But the question on everybody's mind is - will it last?

Below are a couple of charts that I like to use to help me with where we are. The top panel of the chart is the log chart of the $SPX.

The second panel is the Bullish Percent Index for the $SPX. As long as the indicator is above the red lines, it is very bullish. Above one of the red lines is strong, but needs to be watched. If it goes below the red lines, that typically means the market is heading into or currently in a correction. One of the things to like about the indicator is that when it keeps pushing above the top line, that shows that lots of stocks are on a buy signal. Since the COVID low, this has been thrusting to very high levels, suggesting lots of involvement in the bull market. Notice the bear markets typically can't get up to these strong levels if we look back in 2003 or 2008. Throughout all of 2018, not many stocks were participating when the trade tariff dispute was underway.

The lower panel is actually one of the best ones to visually demonstrate the strength of the bull market clearly. Notice how the bull markets of 2003, 2009, 2011, 2013 and 2020 all hit this level. Even in 2007, it reached up there, but the stock market never topped until 6 months after this high level.

Without a doubt, both indicators are demonstrating the traits of a big bull market. I would suggest that, unless we get a hiccup in the vaccines, the market is looking past the near-term slowdowns.

 

Good trading,

Greg Schnell, CMT, MFTA.

We have all heard that "a rising tide raises all boats," and at DecisionPoint.com we have come to think of the direction of the market tide as being a bias that can benefit or work against our trading positions. As regular market participants, we may have a general sense that the market has a bullish or bearish bias; however, it would be useful to have objective ways to assess that bias. This is something we evaluate on a daily basis in the DecisionPoint Alert, and here are some of the tools we use.

For the short term, we use the Swenlin Trading Oscillators for breadth (STO-B) and volume (STO-V). The normal range for both indicators is +400 to -400, and, on the one-year chart, we first assess how they are situated within that range. During the bear market earlier this year, a bearish bias was clear, as the STOs quickly plunged well below that normal range and stayed below zero until shortly after the March low. After that low, a bullish bias quickly became evident as the indicator ranges shifted to mostly above the zero line, and the time spent above the zero line far exceeded that spent below the zero line.

Beginning in September, the STO ranges began to shift to a more neutral stance as the moves below zero became deeper. Nevertheless, the time spent below zero was still less than that spent above, so the bias was still bullish.

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For longer-term assessment of market bias, we use the Intermediate-Term Breadth and Volume Momentum Oscillators (ITBM and ITVM). Using the same methodology as on the short-term chart, we can see that bias has been persistently bullish for the last three years, with the two bear markets, of course, offering splashes of bearishness. The question arises: is this the normal posture for these indicators?

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Click here to register in advance for the recurring free DecisionPoint Trading Room! Recordings are available!

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Looking at a 22-year chart, we can see that the indicators have favored a bullish bias since the 2009 bear market low. However, from 1999 to 2007, a neutral to bearish bias was more the norm.

CONCLUSION: Assessing market bias can help us make trading decisions that are compatible with the changing tide of the market. Our DecisionPoint indicators can provide objective evidence for making these decisions.

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Technical Analysis is a windsock, not a crystal ball.

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Helpful DecisionPoint Links:

DecisionPoint Alert Chart List

DecisionPoint Golden Cross/Silver Cross Index Chart List

DecisionPoint Sector Chart List

DecisionPoint Chart Gallery

Trend Models

Price Momentum Oscillator (PMO)

On Balance Volume

Swenlin Trading Oscillators (STO-B and STO-V)

ITBM and ITVM

SCTR Ranking

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The market rotation of late has resulted in some explosive moves in some "forgotten stocks." This has been particularly true of those stocks that have a high percentage of shares short.

As an example, take a look at the two charts below. Both of these stocks are on our "Short Squeeze ChartList", which includes stocks that have a short percentage of float of above 20%.

In the case of JWN, the stock has exploded to the upside; it was up over 135% from its low on November 6 to its high this past Wednesday.

In the case of PGEN, the stock just broke out this past Wednesday after testing its 200-day moving average in late October, rising over 90% at its high on Wednesday in just a few weeks.

Why the huge moves? Because when the recent rotation kicked in, the shorts were in a box. They had to get out of the way as these stocks came roaring back.

We've seen a number of stocks on our Short Squeeze ChartList make substantial moves to the upside recently; it makes perfect sense. For a long time, many of the stocks lagged the overall market. But with the rotation away from higher growth stocks to some of the laggards, it was off to the races.

Our Chief Market Strategist Tom Bowley has identified other stocks on the list that could be primed for strong moves to the upside. If you would like to see one of those stocks Tom has his eyes on, just click on this link and sign up for our FREE EarningsBeats Digest, which will be sent to you Monday morning before the market opens.

At your service,

John Hopkins

EarningsBeats.com