SMALL CAPS vs. LARGE CAPS

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Small caps show relative weakness vs. the large caps when investors move out of riskier/high-beta names and into relatively safe large caps. Opposite can be said during small cap strength vs. large caps.

There are two ways to capture this relationship to understand if there is a possibility of small cap outperformance in the following weeks.

1) Russell 2000 vs DJIA is now testing a 6 year-long trend line support. Until it is broken down, these type of trend lines are expected to resume the current trend. In this case the trend is upwards and the ratio is likely to rebound from the long-term support, resulting in an outperformance for the small caps.

RUSSELL VS DOW JONES INDUSTRIAL

Data Source: Thomson Reuters, Charts created in MetaStock

2) Russell 2000 vs. S&P 500 index is now testing the lower boundary of the horizontal trading range. A rebound from the lower boundary will likely result in an outperforming period for Russell 2000 index versus the S&P 500 index.

RUSSELL VS S&P 500

Data Source: Thomson Reuters, Charts created in MetaStock

U.S. DOLLAR/HUNGARIAN FORINT

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U.S. dollar remains strong against major cross-rates. Several emerging market currencies lost ground against the U.S. dollar during 2014-2015 period. Weak performance was interrupted by a medium-term consolidation over the past few months.

U.S. dollar/Hungarian Forint formed one of those identifiable consolidation chart patterns that is usually regarded as a flag or a triangle. These type of consolidation chart patterns usually resolve in the direction of the dominant trend, in this instance possibly upwards.

Breakout above 290-295 area will target the historical high around 320 levels. Expect emerging market currencies to remain weak in the following months.

USDHUF

MSCI WORLD MARKETS vs. MSCI EMERGING MARKETS

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Central banks across the globe are showing their support for the financial markets by either delaying interest rate hikes or cutting interest rates and showing willingness to increase quantitative easing measures. After the ECB’s dovish comments, Chinese central bank cut interest rates to boost economic growth.

Since 2011, markets are positioned for emerging market weakness and this trend continues to remain intact irrespective of interest rate cuts or additional monetary stimulus by central banks. Emerging markets continue to underperform developed markets as the ratio between MSCI World Markets/MSCI Emerging Markets shows. This trend is likely to continue in the following months.

MSCI DM vs. MSCI EM

SAUDI ARABIA TADAWUL INDEX

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Saudi Arabia’s Tadawul index breaks down 6 year-long uptrend. 2009-2014 uptrend retraced 38% of the downtrend formed between 2006 and 2009. A fibonacci retracement of 38% and less is considered to be a weak recovery. There is a high probability that the last 6 year’s weak uptrend was not the beginning of a long-term cyclical bull market. With the latest breakdown Saudi Arabia’s index could enter into a larger scale multi-year correction targeting 2009 low levels.

Strong resistance area will remain between 8,000 and 9,000 levels.

SAUDI ARABIA TADAWUL INDEX * Weekly scale price chart of Saudi Arabia Tadawul Index                   Data: Thomson Reuters

U.S. DOLLAR/INDIAN RUPEE

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Emerging market currencies had a relief rally over the past month. U.S. dollar weakened against most of the emerging market currencies with the expectation of a possible delay on FED rate hike. Counter-trend moves in the emerging market currencies might be over and we can see another phase of weakness. An important EM cross-rate is the U.S.Dollar/Indian Rupee. Once again the cross-rate pulled back to its 2 year-long trend line support. Both the 2 year-long trend line and the 100-day moving average form support between 64.50 and 64.80. Given the oversold condition on MACD, we can expect a possible rebound from the long-term support area resulting in Indian Rupee weakness.

In the case of a breakdown below 64.50 levels we will expect Rupee to gain strength and possibly reverse the 2 year-long trend.

USDINR

MSCI ALL COUNTRIES WORLD INDEX

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Global equity markets are showing weakness. A possible change in trend is in progress. Over the past few decades 2 year moving average proved to be a good indicator for following long-term trends. Price is now below the long-term average and as long as it remains below this technical level probability of further correction in equity markets will increase. 407 level will remain as strong resistance.

MSCI ALL COUNTRIES WORLD INDEX II

TURKEY, SOUTH AFRICA and BRAZIL

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It started with weakness in emerging market currencies (archive for emerging market currencies) then it spread to equity markets and now emerging market yields are under pressure. From commodity exporting economies to energy importers, almost all emerging markets experienced high volatility. Charts are telling us that the high volatility is here to stay and possibly spread to other investment areas. This update shows the technical damage on the 3 major emerging market economies; Brazil, South Africa and Turkey. By looking at these charts one would wonder how much more shocks can these markets absorb. It looks like the bond markets can experience some heat in the following months.

BRAZIL

MSCI BRAZIL

Sharp sell-off in Brazilian equities breaks down 2008 low levels. MSCI Brazil underperforms the MSCI Emerging Markets index.

MSCI BRAZIL vs MSCI EM

U.S. Dollar vs. Brazilian Real is now close to 4 levels. Since the breakout above 2.62 levels, depreciation in Brazilian Real has taken a parabolic shape. Breakout above 4 levels will push the cross rate to uncharted territory.

 USDBRL

10 year government bond yields completed 7 year-long base formation, suggesting a price target of 18 levels.

BRAZIL 10 YR YIELDS

BRAZIL GDP GROWTH RATE

Source: www.tradingeconomics.com

SOUTH AFRICA

MSCI SOUTH AFRICA

MSCI South Africa is now testing strong support at 445 levels. Breakdown below this level can push the index towards 350 levels.

MSCI SOUTH AFRICA vs MSCI EM

MSCI South Africa has outperformed the MSCI Emerging Markets index. This is positive on a relative basis.

USDZAR

U.S. Dollar vs. South African Rand is now challenging all-time high levels. Depreciation against the U.S. dollar resumes…

SOUTH AFRICA 10 YR GOVT BOND YIELDS

South Africa 10 year government bond yields are completing a massive 5 year-long base formation. Breakout above 8.9 levels can result in a similar move that we have seen on the Brazilian government bond yields.

SOUTH AFRICA GDP GROWTH RATE

Source: www.tradingeconomics.com

TURKEY

MSCI TURKEY

MSCI Turkey breaks down decade-long trend line support. Also the index breached the 5 year-long support at 400 levels.

MSCI TURKEY vs MSCI EM

If we take the relative performance of MSCI Turkey vs. MSCI Emerging Markets we can conclude that the index have been flat since 2004!

USDTRY

After completing its decade-long consolidation which took the form of a continuation head and shoulder U.S. Dollar/Turkish Lira broke out above 1.8 levels and since then the sharp depreciation pushed the Lira to historical high levels. Added to the emerging market weakness, political uncertainty and security issues put further pressure on Turkish economy and its financial markets.

TURKEY 2 YR GOVT BOND YIELDS

Turkish short-term yields are completing a massive 6 year-long base formation. Breakout above 11.8 levels can push the yields to 19 levels in the following months.

TURKEY GDP GROWTH RATE

Source: www.tradingeconomics.com

CBOE VOLATILITY INDEX (VIX)

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CBOE Volatility index moves into a new territory of high volatility. Usually high volatility periods suggest corrections in equity markets. In the past several decades breakouts above 20 levels on the VIX was followed by major equity market corrections.

Chart shows CBOE Volatility Index with weekly closing prices. Last week of August the VIX closed at 26.05 levels which was clearly above strong resistance at 22. Last few weeks surge in volatility cleared two important technical levels. Both the 7 year-long downward sloping trend line and the horizontal resistance at 22 levels were broken on the upside, suggesting a change in trend.

Unless we see a sharp reversal below 22 levels, following weeks/months will lead to higher volatility levels and further weakness in global equity markets.

*Chart shows updated current price as of 1/9/2015 EST 12:30 PM

CBOE VIX