DOLLAR COLLAPSE SINKS STOCKS -- BOOSTS GOLD
STRONG DOLLAR POLICY IS OVER... Given its weak trend for over a year, we've suspected that the government was allowing the dollar to fall to stem deflationary tendencies and to create a little inflation. Treasury Secretary Snow's comments over the weekend appeared to support the view that the U.S. government had abandoned its strong dollar policy. As a result, the dollar plunged to a four-year low against the Euro. That unsettled the stock market just as it was testing the upper end of its trading range. We suggested in our weekend update that if the falling dollar was going to hurt stocks, this would be chart spot for it to happen. The collapse in the dollar pushed gold prices $8.00 higher and over its next hurdle near $360. Naturally, gold stocks were very strong today. Two of the weakest stock groups were drugs and retailers.
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BRISTOL MYERS SQUIBB AND PFIZER LEAD DRUGS DOWN... The daily charts of these two big drug stocks tell the sorry tale. Both stocks tumbled today on masstive trading volume. That's never a good sign. They're challenging their moving aveage lines. Both stocks failed to exceed their highs formed during the fourth quarter of last year. That keeps them in their respective trading ranges.
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NEWMONT GLITTERS... With gold stocks riding high today, Newmont Mining was one of the strongest stocks in the S&P 500. The daily chart shows NEM climbing to a three-month high on strong volume. The stock is nearing the highs of last year around 30. That's a very important resistance area. The monthly chart shows why. Newmont appears to be in the final stages of a major bottoming formation (possibly a "right shoulder" in a "head and shoulders" bottom). We recently commented on the consolidation over the past year as "triangular" in shape. That's a bullish pattern -- as is the head and shoulders. A decisive close above the $30-32 zone would represent a major bullish breakout. Given the downtrend in the dollar, we think an upside breakout by Newmont has a high probability. We continue to believe that gold stocks are the main beneficiaries iof the Fed's fight against deflation.
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S&P 500 SHORT-TERM TREND TURNS DOWN... The S&P 500 suffered a couple of short-term negative signals today. The first was the breaking of the 20-day moving average. That suggests at least a pullback to the lower Bollinger Band near 900. The second one is the negative crossover in the daily MACD lines. Last week when we discussed the "sell in May and go away" theme, we suggested that an MACD sell signal was needed to signal a short-term top. We got one today. The fact that the S&P 500 had reached its December high at 950 was another reason to be a bit more defensive at this point. Now it's a matter of what shape the correction takes. For more on that, please read our Money Management update.
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MONEY MANAGEMENT UPDATE... Although our technical indicators are still generally positive, Monday's selloff may be the start of a much-anticipated correction. The important focus now is on how any corrective action plays out. One possiblitity is a short organized correction that would allow us to get fully invested. Another possibility is a sideways muddling correction that could start to trip some trend signals; Or, we could witness a more serious decline that would force us to protect some profits (by selling funds) or putting on short funds to become somewhat market neutral. We'll be monitoring our positions closely over the next few days to see how they hold up relative to the rest of the market. And, we'll be monitoring market action on a daily basis. It will probably take another couple of days to determine the nature of any downside correction. In the meantime, we invite you to view our May 15 Money Management Model update, which shows the status of some of our technical indicators. You can get there by clicking in the yellow box on the upper right of the MurphyMorris.com home page.
