FALLING DOLLAR STILL BOOSTING COMMODITIES -- ENERGY MARKETS ARE JOINING COMMODITY RALLY

FALLING DOLLAR CONTINUES TO BOOST COMMODITIES... Anyone who doubts the fact that commodity prices trend in the opposite direction of the U.S. Dollar need only compare Charts 1 and 2. They show the major upturn in the CRB Index at the start of 2002 coinciding with the major downturn in the U.S. Dollar Index. It's also no coincidence that the Dollar Index fell to a seven-year low today at the same time that the CRB Index rose to a seven-year high. Today's biggest movers in the CRB Index are in the energy pits. Natural gas prices surged 12% to another six-month high. Heating oil came in second with a gain of 5%; crude oil was third with a gain of 4.3%. It was just a matter of time before the energy markets started to pay catch-up with the rest of the commodity markets.

Chart 1

Chart 2

CRUDE OIL JOINS COMMODITY RALLY... Charts 3 and 4 compare the CRB Index rally to crude oil prices over the past year. The CRB resumed its major advance during the summer months. Crude oil, however, stayed relatively flat. That's an unusual situation and one that couldn't continue forever. It seemed just a matter of time (and some cold weather in the northeast) to get the energy markets to join the commodity rally. That may now be happening. Crude oil gained $1.37 today to close at 32.10. It's not far from an upside breakout. Crude oil is the weakest of the energy markets. Natural gas and heating oil have actually been gaining more ground. That's because they're more sensitive to cold weather. Natural gas has already broken out to a six-month high. Wall Street has taken notice. That's why energy stocks were so strong last week.

Chart 3

Chart 4

OIL SERVICE STOCKS ARE TURNING UP... As I pointed out last week, natural gas stocks are the strongest part of the energy sector -- while oil service stocks have been the weakest. That's because oil service stocks are more closely tied to crude oil prices which have been flat. Chart 5 shows the OSX Index rising above its 200-day average and breaking a six-month down trendline. Its RS line has also broken a falling trendline. One brokerage firm today advised against "chasing" this group. I don't agree.

Chart 5