BROKERS AND MATERIALS LEAD BLUE CHIP AVERAGES TO NEW HIGHS -- BONDS AND STOCKS HAVE RECOUPLED
GOLDMAN SACHS LEADS BROKERS HIGHER... Brokerage stocks gained almost 4% today and helped lead the financial sector to a strong day's performance. Four brokers hit new 52-week highs including Bear Stearns, Goldman Sachs, Lehman Brothers, and Merrill Lynch. A brokerage upgrade of Goldman Sachs this morning pushed that stock to the highest level in nearly three years. The relative strength line beneath the stock shows that GS has been an outperformer for some time. Chart 2 shows Lehman Brothers challenging the previous high reached near the start of 2001. Chart 3 shows Merrill Lynch, the group bellwether, closing over 60 for the first time in thirty months.
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PHELPS DODGE HITS SEVEN-YEAR HIGH... Phelps Dodge continues to benefit from a major bull market in the price of copper. Copper was the top performing market in a rising CRB Index today. March copper rose 3% to close over $1.20 for the first time since 1997. Coincidentally, the monthly chart of Phelps Dodge shows the copper producer also trading at the highest level since 1997. PD is nearing the all-time high reached during that year. Alcoa also gained 5% today although it didn't reach another new high. Commodity-related stocks did well today on the back of a jump in commodities and a drop in the dollar. Gold stocks benefited from a $4.00 rise in the price of gold. Rising oil prices boosted energy shares. The rally in commodity prices and financial stocks were tied to the market's reactions to Mr. Greenspan's testimony before Congress this morning.
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DOLLAR AND BOND YIELDS DROP SHARPLY... Mr. Greenspan's testimony seemed to please everyone today. He expressed the view that the falling dollar was beneficial to the U.S. deficits. Immediately after that statement, the dollar dropped sharply against the Euro. At the same time, bond prices jumped and bond yields dropped. The drop in the dollar gave a big boost to commodity prices and their related stocks. The drop in bond yields gave a big boost to financial stocks. Although all the major stock averages closed sharply higher, the biggest gains were seen in the blue chip averages. The Dow, the NYSE Composite, and the S&P 500 Indexes hit new recovery highs. The Dow and the NYSE have reached the highest level since 2001. As has been the case recently, small caps and techs lagged behind the large blue chips.
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DOW EXCEEDS 2002 PEAK... The Dow Industrials closed up 144 points today at 10737. That puts it above its early 2002 peak at 10673. That's an impressive accomplishment -- especially if it can maintain that breakout through the end of the week. Big board volume was higher today and advancers exceeded decliners by a two to one margin. In other words, an impressive day all around.
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BONDS AND STOCKS ARE RECOUPLING... Historically, bond and stock prices trend in the same direction. From 2000 to the middle of 2003, however, they travelled in opposite directions. During those three years, bond prices rose while stock prices fell. That meant that falling interest rates didn't really help stocks. In fact, rates and stocks fell together. Since the middle of last year, however, bond and stock prices have been recoupling. In other words, they seem to be trending in the same direction again. Charts 7 and 8 compare the Dow to the price of the long bond since last September. Although stocks have been much stronger than bonds, their peaks and troughs are more closely correlated. Today was a good example of that. Bond prices jumped almost a full point on belief that interest rates would stay down. That gave a big boost to the stock market -- and financial stocks in particular. There's good news in that as long as rates do stay down. However, it also means that stocks are more dependent on low rates than at any time since 2000. Today's drop in yields occurred as the dollar fell sharply. The market also knows that Asian central bankers will be buying more U.S. Treasuries as the dollar weakens. Mr. Greenspan knows that too.
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