Will Stock Market Gains Hold?

As the pattern of global economic data of less negative numbers continues, a shift may be taking place in asset pricing.  Two possible reasons among many:

1)  Asset prices are taking a break from the rapid appreciation realized since March

2)  Economic data needs to move from less negative to positive as a catalyst for continued appreciation from current levels 

 In terms of asset prices, most of the month of June has been spent consolidating.  Consolidation is a normal process and can be very bullish.  Unfortunately, market action recently has led to price declines.  My first course of action is to try and gauge whether we are going to experience a normal pullback or something more aggressive.

Commodity markets were a big part of the rally from March lows.  Due to their sensitivity to the U.S. Dollar, we might be able to find near term price clues by comparing the two assets.

In the Chart below, the top window shows the daily price for the U.S. Dollar reversing up after the decline that started in mid-April.   The bottom window shows the relative strength ratio between broad commodities (Powershares DB Commodity Index, DBC) and the U.S. Dollar ($USD).  An upward sloping line indicates the first symbol is stronger than the second.  The trend turned flat in early June and has a slight downward bias.  A move past $82 on the U.S. Dollar may signal further weakness in commodities.  So far oil has been able to hold most of its recent gains but strength in the dollar would be negative for crude oil prices.

(CLICK ON IMAGE FOR FULL VIEW) 

After a strong start to the month stocks have started to rollover.  The nearly 4% decline since Friday in the S&P 500 has already put the index in oversold condition (as indicated by the reading below 30 in the lower window of the chart below), which could signal a near term bounce ahead.  For a clue regarding the strength of the bounce, we can turn to the Relative Strength Indicator (RSI) in the bottom window of the chart below.  The key will be how the indicator behaves around 50.  Any weakness at this level may indicate further price pressure on U.S. stocks.  A move past 50 on the RSI would be bullish for the S&P 500.

(CLICK ON IMAGE FOR FULL VIEW)  

For additional cues about the strength or weakness of any bounce from current levels, consult breadth indicators, volume levels and sector participation data.

You might be wondering how international stocks are doing.  They were very strong and led the rally from March lows with gains in emerging markets of approximately 54.9%, developed international markets 45.6% and 35.5% for the S&P 500 as illustrated below.

(CLICK ON IMAGE FOR FULL VIEW)  

More recently, however, they are also leading the declines.

(CLICK ON IMAGE FOR FULL VIEW)  

Of note is how China is handling the current weakness.  It has held up better than many other emerging markets; an important development to monitor.

(CLICK ON IMAGE FOR FULL VIEW)  

We may be in the early stages of a market transition.  Continued strength in the dollar would be bearish for commodities and techical data on stocks may help us gauge near term market direction.  Continued leadership from China would be very constructive for that market.