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Stocks Continue to Climb but Participation is Narrowing

David Becker
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Stocks Continue to Climb but Participation is Narrowing

The stock rally is continuing to become narrower as large cap U.S. stocks continue to lead the way but small and midcap stock along with foreign stocks are trailing. This divergence will only last so long as the technical are pointing to resistance for foreign stocks.

The fact that foreign stock indexes are testing major overhead resistance barriers puts them at an important juncture, and adds to the possibility of a global stock pullback which would include the U.S. The monthly bars in the EAFE Index iShares (EFA) are starting to back off from a test of its 2007 peak. Most of the recent selling in that index of foreign developed markets has come from Europe.

Australia has started to roll over as well on weakness in commodity markets and fears of a slowdown in China. Although the S&P 500 recently hit a record high it usually does better when foreign shares are rising along with it. Emerging markets are undergoing a major test of their own. The monthly bars in show that the Emerging Markets iShares (EEM) are backing off from a major resistance line drawn over its 2007 and 2011 highs. Recent concerns about weakness in have weighed on Chinese and Brazilian stocks.

As expectations for rising U.S. interest rates, and a stronger U.S. dollar, could also put downside pressure on emerging markets by reducing flows into their higher-yielding markets. The September slide in the EEM has coincided with a bounce in 10-Year Treasury yields. Within the U.S. market, another sign that upside participation is narrowing can be seen in the NYSE Percent of Stocks Above their 50-Day Moving Average. That index peaked over 80% in late June. Its August rally only took it 65%. which was well below its summer high.

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