NYSE INDEX HITS NEW RECOVERY HIGH -- THE DOLLAR IS THREATENING MAJOR SUPPORT

DOLLAR FALLS BACK TO YEARLY LOW... A strong jobs report last Friday produced a bounce in the Dollar Index off its June low. It fell heavily today, however, and is within striking distance of this year's low again. Chart 1 shows that the rally in the Dollar Index from that summer low failed at its 200-day moving average. A new low would resume the dollar's downtrend. Chart 2 paints an even more negative picture. That's because the monthly bars show that the Dollar Index is also threatening chart support at its late-1998 low. A downside violation of that major low could send the dollar all the way back to its 1995 bottom. Virutally all major currencies rose against the dollar today led by the yen. For reasons that I explained a couple of weeks back, the rising yen (and falling dollar) are potentially bearish for bond prices. That's because the Japanese have been big buyers of U.S. Treasuries with dollars that they've bought in the past. If they stop buying dollars (to keep the yen from rising), they may stop buying U.S. Treasuries as well. That may explain why the 10-year T-note yield rose today (as prices fell).

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BOND YIELDS BOUNCE OFF 200-DAY AVERAGE... I've pointed out in the past that bond yields and the dollar have been trending in the same direction at least since the summer. They're starting to diverge. Over the past week, the 10-year T-note yield has bounced off its 200-day moving average. Yields rose today as bond prices fell. Higher bond yields are a potential negative side-effect of the new flexible exchange rate policy. That's because the Japanese are the largest foreign holders of U.S. Treasuries. Another reason for bond yields to climb from here is because a falling dollar is potentially inflationary. Commodity prices recently hit a new six-month high as the dollar fell. Gold prices jumped $4.00 today on the weak dollar and gold stocks gained 3%. Chart 4 shows gold prices bouncing off their 50-day moving average today and chart support along the $368 level. Chart 5 shows the AMEX Gold Bugs Index bouncing off its 50-day line. Higher inflation usually results in higher bond yields.

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NYSE INDEX REACHES NEW HIGH... The stock market closed higher. Interestingly, the only stock index to hit a new high was the NYSE Composite Index. All the other stock averages are still testing their September high. Chart 7 shows that the Nasdaq has yet to hit a new recovery high. It's encouraging to see volume pick up from yesterday, although it was still generally light. We've detected a slight shift in market leadership away from the Nasdaq market and back to the NYSE over the past week. Normally, we take that as a slight caution signal. Our Money Management work shows that the stock market usually does better when the Nasdaq is in the lead. At this point, however, the discrepancy is relative minor. Two other things that concern us a little are a potential collapse in the U.S. dollar and the start of the earnings season. The market has built in some pretty big expectations. There's a lot of room for disappointment. Ultimately, price action determines our actions. We're still a bit cautious in our analysis and our Money Management work, but are still holding on to most of our positions. At least until the market dictates otherwise.

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