CRB INDEX REACHES POTENTIAL RESISTANCE BARRIER -- JAPANESE BOOST DOLLAR -- GOLD SHARES AND HOMEBUILDERS CORRECT -- CANADA IS WEAKENING

CRB INDEX REACHES POSSIBLE RESISTANCE AT 1996 PEAK... The CRB Index of 17 commodity markets is in the midst of a major uptrend. We've pointed that out several times over the past year. Most commodity markets have participated in the rally -- as have common stocks tied to those commodities. Over the short-run, however, commodity prices may be due for some corrective action. That's because of the pattern shown in Chart 1. My main upside objective for most of this year has been a challenge of the early 1996 high just above the 261 level. The CRB exceeded that level by a little bit today before selling off. It ended down .58 at 260.47. While I remain bullish on the longer-term direction of commodity prices, the CRB Index has reached a level that could cause some profit-taking in the commodity group. In addition to obvious chart factors, there are two other intermarket factors that may cause commodities to correct. One is the prospect for higher interest rates, which the Fed hinted at this week. Higher rates in the U.S. would be supportive of the dollar. The dollar saw its biggest jump in three weeks today against the yen -- and bounced against the Euro. That was primarily due to Japanese central bank intervention. Even so, today's dollar bounce may also explain the drop in gold bullion from an intra-day high of $413 to a lower close at $407. As a result, gold stocks suffered heavy profit-taking today. Basic material stocks were today's weakest group as well. Canada also sold off. More on that later.

Chart 1

GOLD STOCKS CORRECT... One of the intermarket principles I follow is that common stocks usually lead their respective commodities. Gold stocks turned up before bullion a couple of years back. The recent downturn in gold shares are hinting at a correction in gold bullion. The AMEX Gold Bugs Index fell more than 5% today and was the day's worst performer. The RSI line has fallen under 50 and the daily MACD lines have turned negative. Newmont Mining was one of the biggest losers in the basic material group today. The big gold producer broke its 20-day average for the first time in eight weeks. And it did so on rising volume. This is symptomatic of corrective action.

Chart 2

Chart 3

HOMEBUILDERS SLIDE... The slide in homebuilders over the past two days is also symptomatic of the market's view that rates may be rising next year. KBH shows some of the damage done to the group. The homebuilder tumbled beneath its November low and its 50-day average -- on heavy volume. Mortgage-related stocks have also caused selling in the financial sector this week. Housing-related stocks are very rate-sensitive.

Chart 4

WINNERS IN CONSUMER STAPLES AND UTILITIES... Traders were buying some consumer staples and utilities today. Duke Energy and SBC were two of the day's utility leaders. DUK is testing its October high at 19. SBC has risen to a five-month high. The weekly bars in Chart 7 show Coca Cola in the process of challenging its June high.

Chart 5

Chart 6

Chart 7

NASDAQ NEARS SUPPORT... Market losses today were relatively modest. Once gain, the Nasdaq was the weakest part of the market. As its lowest point today, the Nasdaq Composite came within nine points of its late November low at 1878. It's important that the Nasdaq stay over that previous support point. The ratio line beneath the chart plots the Nasdaq vs. the S&P 500. The ratio line has fallen to the lowest level in ten weeks. It's much tougher to make money in the market when the Nasdaq is showing relative weakness.

Chart 8

CANADA IS TIED TO COMMODITIES... Since Canada is a big producer of commodities, it usually does pretty well when commodity prices are strong. [The same is true of the Canadian Dollar]. That helps explain why Canada has been one of the world's strongest markets over the past year. Two things caught my eye today. One was the sharp drop in the Toronto (TSE) Index from the 8000 level. That selloff took place on heavy volume. The ratio of the TSE vs. the S&P 500 has also slipped over the past week. Why the 8,000 level is so important can be seen in the weekly bars in Chart 10. That's the exact price peak reached in Canada at the start of 2002. That's also a logical spot for the Canadian market to correct. Since Canada's rally has been tied to the commodity rally, that may be another sign that commodity markets are over-extended.

Chart 9

Chart 10