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Stocks Face Headwinds as Eurozone Stocks Drag on US Markets

David Becker
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www.iforex.com

High yield bonds and Eurozone stocks continue to generate headwinds for the broader markets despite today’s bounce. The divergence has been obvious over the past few weeks, and despite today’s respite, could continue to drag the US markets lower.

High Yield Corporate Bond iShares plunged again last week to their 200-day moving average. That’s the biggest loss since the spring of 2013. Last week Junk bonds sliced through the 50-day moving average, reflecting the decline in the riskiest part of the bond markets. Small caps were also under pressure with the Russell 2000 moving through the 200-day moving average and poised to test the May lows near 1090.

The Eurozone is threatening the global rally in stocks, including the U.S. Not surprisingly, last week’s plunge in Europe finally had a negative impact on most other developed markets. EMU iShares (EZU) fell below its 200-day moving average, on rising volume. That’s the first time the index of Eurozone stocks has fallen below that long-term support line in a year. The EZU is a basket of Eurozone stocks with the biggest holdings in France and Germany.

Germany is the biggest economy in Europe and has a big influence on that region, so it’s not good news to see the German DAX Index falling below its 200-day line this week. That’s the first time the DAX has ended the week below that long-term support line in two years. The French CAC Index is also facing pressure. That breakdown finally took its toll on U.S. stocks, which were already showing a number of negative divergences.

The EZU is poised to test support near the February lows at 38.25. Momentum has turned negative with the MACD (moving average convergence divergence) index generating a sell signal and printing in negative territory with a downward sloping trajectory.

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