DOLLAR FALL CARRIES SOME WARNINGS -- SO DOES THE MONTH OF MAY
DOLLAR FALL IS TROUBLING, BUT IS GOOD FOR GOLD... Probably the biggest story of the week was the tumble in the dollar to a four-year low. Although most of the attention has been focused on the rising Euro, the fact is the dollar fell against virtually every other currency as well. The weakness in the dollar is based primarIly on the fact that U.S. rates are lower than everybody else -- with the exception of Japan whose rates are zero. Money tends to leave low-yielding currencies (like ours) and moves to higher-yielding currencies like the Australian and Canadian dollars as well as the Euro. Their strong currencies aren't a sign of their strength, but of our weakness. That's why their stock markets haven't been doing any better than ours. In a weak global economy, their strong currencies aren't necessarily a plus for them either. Big exporters like Germany and Japan are actually hurt by a rising currency. The biggest problem for us is that a weak dollar causes foreign investors to pull money out of U.S. bonds and stocks. They've already been doing that for several months. A weaker dollar also signals that the world expects U.S. rates to continue low, which is a symptom of economic weakness. That doesn't mean the stock market can't go up from here. But it does mean that any upside progress will probably be limited. As we've said repeatedly, the market that gains the most from a falling dollar is gold. It's no surprise that gold prices surged this week as the dollar fell. We continue to believe that gold is in the early stages of a new bull market.
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NO DEFLATION IN COMMODITY MARKETS... It's interesting that the Fed issued a deflation alert this week. [We first started talking about deflation about four years ago]. One of the ways we measure inflation/deflation trends is by watching commodity prices. Interestingly, commodity prices have been rising for the past year. The upturn in the CRB Index at the start of 2002 coincided with the last peak in the dollar. That suggests to us that the deflation threat may already be easing. With U.S. rates so low, the Fed can't lower them much more. One thing they can do (and we believe they have been doing) is allowing the dollar to collapse over the past year in an attempt to create a little inflation. They appear to have succeeded at least in the commodity markets. Late last year the CRB Index hit a five-year high. The recent pullback is finding new support at its 40-week moving average. This week's bounces in gold and oil certainly helped. So did the falling dollar.
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COMMODITIES OUTPERFORM STOCKS FOR FIRST TIME IN TWENTY YEARS... We've shown this chart before, but we thought it a good time to show it again. It's a relative strength (ratio) comparison of the CRB Index (representing commodities) to the Dow (representing stocks). Since the early 1980s, the falling ratio line signalled that stocks were the much stronger asset class. The twenty-year down trendline, however, has now been broken. That suggests to us that a generational pendulum has shifted away from stocks (or paper assets) and back to hard assets. That means the falling dollar is a good news/bad news thing. Bad for stocks, but good for commodities.
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SELL IN MAY AND GO AWAY -- BUT NOT JUST YET... This phrase has become a cliche, but nonetheless it's our job to point out that the market has now entered what has historically been the weakest six months of the year -- from May 1 to the end of October. Yale Hirsch in the Stock Trader's Almanac discovered that the market does much better between November 1 through April 30 than it does between May 1 and October 30. According to his research, the difference between the two six month periods since 1950 is pretty significant. We also thought it a good time to point out this historical tendency toward underperformance starting in May since the major stock averages are very close to the tops of their trading ranges. There is one additional refinement, however. Hirsch credits Sy Harding with improving the performance of his "Best Six Month" approach by implementing the MACD indicator to fine-tune entry and exit points. For example, the daily MACD lines turned positive in the early part of October. That warranted an earlier entry point (which would normally have been on November 1). The daily MACD lines are still positive. If someone is thinking of taking some May profits, it might be better to wait until the MACD lines give a sell signal.
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MONEY MANAGEMENT UPDATE... As our technical indicators have continued to strengthen, we've continued adding money to our MurphyMorris Money Management accounts. Right now, our growth porfolios are 75% invested. Our indicators are still positive, but somewhat over-extended. As the market approaches some resistance levels, one of two things will happen. If the market starts to pullback, we'll use defensive measures (like a bear fund) to protect existing positions. That would move us back to a more "market neutral" position. If the market breaks out to the upside, we'll add more long positions. Either way, we follow the dictates of the market and our indicators. We invest in equity mutual funds that combine good relative strength with low volatility. The chart below shows our most recent portfolio addition.
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LAS VEGAS MONEY SHOW... We'll be at the Las Vegas Money Show from next Tuesday through Friday. If you're at the show, come by our Stocharts.com booth and say hello. Or better yet, come by one of the presentation given by myself or Chip Anderson. It'll be time well spent.
