GOLD, OIL, AND BONDS TUMBLE AS DOLLAR AND STOCKS SURGE -- CYCLICALS AND TRANSPORTS LEAD RALLY
COMMODITIES PLUNGE...DOLLAR RALLIES... Key commodities continued their plunge this week. May crude oil ended the week below $27 and appears headed for a test of last November's low at $25. Gold prices fell another $6.90 today to close at $326. That puts gold at its major breakout of several months ago at $325, which we had identified as our downside target. [Interestingly, copper prices rose today. More on that later}. The Euro has fallen to the lowest level in two months, reflecting strength in the U.S. dollar. The rallying dollar is bearish for gold, but bullish for stocks. With stocks surging, bonds also had a terrible week.
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BOND YIELDS SURGE OVER 4%... The yield on the 10-year T-note has surged over 4.00% for the first time in two months -- and is challenging its 200-day moving average. Treasury bonds, which fall as yields rise, had the worst drop since 2001. That's good news for stocks since it confirms that serious money is coming out of bonds and back into stocks.
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DOW CLEARS 200-DAY AVERAGE...CYCLICALS LEAD RALLY... The Dow completed one of the best week's in years. In so doing, it ended the week above its 200-day moving average. That's the first close over that resistance line in ten months. The Dow was actually the biggest percentage gainer among the major stock averages. That's due to strong action in five of its leaders -- Disney, Caterpillar, Dupont, JP Morgan, and GE. We showed GE closing above its 200-day line earlier in the week and suggested that was a positive omen for the Dow. We were especially impressed with the chart of Caterpillar and DuPont today. The latter owes its strength to a strong rebound in chemical stocks, which get a big boost from falling energy prices. Caterpillar was part of a 4% rebound in cyclical stocks, which were among the day's strongest stocks. Given the market's new optimism this week, economically-sensitive cyclical stocks are attracting funds on increased hopes for an economic rebound. That also explains a decent jump in copper prices today, while most other commodities fell. Copper usually gains ground on hopes for a stronger economy. [That also explains leadership coming from large cap growth stocks, which we showed earlier in the week].
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TRANPORTS SURGE 4% -- LED BY AIRLINES... Another group that gets a lot of help from falling oil is transportation. That explains why the transports gained over 4% on Friday. Airlines were especially strong. The Airline Index XAL) closed back over its 50-day average for the first time in two months. While most airlines scored big percentage gains on Friday, three of them have promising chart patterns. Northwest saw especially heavy trading as it surged to its 200-day line today. It's the closest to challenging its November highs. Southwest has already cleared its 200-day average -- and has also shown impressive upside volume all week. Over on the Nasdaq, Ryanair was one of the highest fliers. It hit a four-month today on good volume. The strong rally in both the Dow Industrials and the Transports is a good sign for the Dow Theory, which holds that both averages must move up together. They are -- thanks to a big selloff in oil.
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DOW HEADED TO 9,000... The Dow's weekly chart picture has also improved fairly dramatically -- as shown below. First of all, this week's rally took place on the heaviest volume since last October. And, the weekly MACD lines have turned positive. We had indicated last week that no serious market upturn could occur unless those lines crossed into positive territory. They did that this week. Whenever a market has a successful test of the bottom of a trading range (and the Dow certainly has), it normally tests the top of that range. With this week's impressive technicals, there seems little doubt the Dow is headed for a test of its August-December highs near 9,000.
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