DOLLAR PLUNGE HURTS BONDS AND STOCKS -- BOOSTS GOLD AND GOLD SHARES
YEN HITS THREE-YEAR HIGH AGAINST THE DOLLAR... Market forces usually win out over market intervention in currency markets. I wrote that statement back on August 29 in a bullish forecast for the Japanese yen. [If you haven't already done so, please read my August 29 Market Message entitled "The Dollar Looks Overbought-The Euro Is Oversold-The Yen is Rallying-All Good for Gold"]. All of the markets are following their intermarket script. Chart 1 shows that the yen bottomed at the start of 2002 (just as the dollar was entering a bear market). The yen had been trading sideways for the past year. It seemed clear that the only thing keeping the yen from breaking out to the upside was Japanese central bank intervention. The G7 statement over the weekend calling for less intervention was aimed primarily at Asian currencies. The dramatic result was today's leap in the yen. We reported on the start of that upside breakout in the yen last Thursday and Friday. We also showed the Euro turning higher last week, which was another bearish sign for the dollar. Our Friday update suggested that gold would be the main beneficiary -- and it was. Gold gained $5. Gold stocks were the only market group to gain ground today. Gold stock indexes hit new multi-year highs.
Chart 1
INTERNATIONAL MARKETS FALL... The plunge in the dollar had a negative impact on global stocks. Hardest hit was Japan, which fell 4%. Japanese exporters fell the most on the rising yen. In Europe, the rising Euro pushed the French and German markets down 3%. Chart 2 shows the Euro jumping against the dollar again today. That hurts European exporters. Chart 3 shows today's plunge in the U.S. Dollar Index, which fell to a three-month low. The bear market rally in the dollar during the summer failed at its 200-day average in early September -- just as the Euro was starting to rally. A falling dollar is potentially bearish for U.S. stocks. One reason is because it pushes interest rates higher. Another is that it dimishes the appeal to foreign investors. Over a third of U.S. Treasuries are held by foreigners with the biggest holders being China and Japan. Needless to say, any selling by the Japanese could hurt U.S. bonds as well as stocks.
Chart 2
Chart 3
US MARKET CORRECTS DOWNWARD... Two of the most actively-traded markets today were the Nasdaq 100 (QQQs) and the S&P 500 SPDRs (SPY). Both fell on heavier trading volume. Last Friday, I talked about the fact that the market advance since August had taken place in five waves, which is often the prelude to a market correction. I also pointed out the short-term negative divergence in the 14-day RSI oscillator. Given those signs of an overbought market, and today's dollar plunge, a selloff wasn't too surprising. The SPY gapped down to test its first level of support at its 20-day moving average. If that doesn't hold, more significant support is seen at 101.35, which is the mid-September low. That level also coincides roughly with the July highs, which may also provide support. If this is just a minor pullback, the September low should hold. If it doesn't, we'll turn a lot more defensive. Chart 4 shows that the September low for the QQQ translates to 33.0l.
Chart 4
Chart 5
GOLD NEARS 6-YEAR HIGH... Gold gained $5 today to close at $388. That puts bullion within a couple of dollars of a new six-year high. The Gold/Silver Index (XAU) hit another multi-year high. We've said before that we think bullion will follow gold stocks higher. New weakness in the dollar increases the odds of that happening. Unfortunately, it also raises the risk level for U.S. bonds and stocks.
Chart 6
Chart 7
