TWO-MONTH HIGH IN DOLLAR CAUSES SELLING IN GOLD -- BOND YIELD JUMP HURTS STOCKS -- TELECOMS RALLY

EURO FALLS BENEATH JANUARY LOW... Today's dollar rally pushed the Euro beneath its January trough to the lowest level since last December. That turns the "short-term" trend of the Euro down and the dollar trend up. The breakdown in the Euro caused a ripple effect in other markets -- some obvious and some not so obvious. One obvious effect was a $5.00 drop in gold. Gold usually trends in the opposite direction of the dollar and the same direction as the Euro. Gold stocks lost more than 2% today on the fall in bullion. Most commodities corrected downward. The CRB Index fell 3.78 as fourteen of its seventeen commodities dropped. The biggest commodity losers were cotton, platinum, silver, and soybeans. Energy markets escaped relatively unscathed by the dollar surge. Natural gas closed up for the day, while crude oil lost only twenty cents. Basic materials (tied to commodities) were the day's biggest sector losers -- mainly stocks tied to copper and gold.

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FREEPORT AND NEWMONT SELL OFF... The two biggest material losers were Freeport McMoran Copper & Gold and Newmong Mining. Last night I showed FCX climbing to a two-month high after having broken a three-month down trendline. Although the rally stalled at the January peak at 45, the selloff was on relatively light volume. Newmont didn't fare as well. Chart 4 shows the big gold mining stock still trading under its 50-day moving average which has stopped recent rally attempts. The 200-day moving sits just beneath the 40 level.

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DOLLAR BOUNCE BOOSTS RATES... I've written recently about the close linkage between the U.S. Dollar and long-term U.S. interest rates. I've even suggested that a higher dollar might have the undesireable effect of boosting bond yields. One of the reasons is that a firmer dollar diminishes the need for Asian central bankers to buy Treasuries. At a speech before the New York Economic Club today, Mr. Greenspan talked about the desirability of China and Japan letting their currencies rise. He described their dollar buying over the last year as "awesome" and acknowledged that most of that was reinvested in U.S. debt. He then suggested that the impact of Asian buying of U.S. Treasuries was "minor" and had little to do with keeping U.S. rates down. Personally, I find those two statements contradictory. Mr. Greenspan also suggested that the weaker dollar was already starting to push import prices higher. That would also boost bond yields since it would imply higher inflation. Then he said the threat of inflation was small. Am I the only one that's having trouble making any sense out of some of Mr. Greenspan's recent speeches? Prices of Treasury bonds and notes fell heavily today. The 10-year T-note yield climed back over 4.00%. The jump in rates took a negative toll on the stock market.

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TELECOM SECTOR JUMPS... While the rest of the market sold off today, the telecom sector had a winning day. Among the Exchange Traded Funds (ETFs) that we track, the two strongest ones are the AMEX Telecom iShares and Telecom Holders. The iShares hit a new 52-week high while the Holders are close to doing the same. Several individual telecom stocks rose on strong volume today.

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TELECOM WINNERS... Among today's telecom winners were Bellsouth, SBC Communications, Qwest Communications, and Verizon. All jumped on rising volume. SBC has bounced off its 200-day moving average. Qwest hit a new closing high on rising volume. Verizon closed at a new eight-month high -- also on rising volume. There were other pockets of strength outside of telecom. REIT and Oil Service Indexes hit new 52-week highs.

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S&P 500 DROPS ON HIGHER VOLUME... All the major stock indexes lost ground today. Chart 11 shows the S&P 500 SPDRS (SPY) backing off from the January/February highs. What was more disturbing was today's pick-up in volume. That's not an encouraging sign. Neither is the fact that the daily MACD lines are still in negative territory. Today's pullback keeps the S&P 500 locked in its recent trading range. The 50-day moving average sits at 113.48. The trend will stay sideways as long as that support line isn't broken. Unfortunately, the Nasdaq fell back beneath its 50-day moving average today on rising volume.

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