ENERGY SHARES RISE DESPITE OIL DROP -- PRECIOUS METALS GET HELP FROM RISING YEN -- FIRST QUARTER LEADERS WERE SMALL CAPS, ENERGY, AND COMMODITIES

OIL PRICES SOFTEN -- PRECIOUS METALS RISE... OPEC announced plans to cut one million barrels a day from production. At the same time, the government announced a big jump in crude oil stockpiles in the week ending March 26. When all was said and done, crude oil prices fell 50 cents today. Chart 1 shows the Goldman Sachs Energy Index still trading off its recent high. Even so, energy shares continued to rise and were the day's strongest sector. That may have caused some nervousness in the rest of the market. Gold prices jumped $5 today to end at $428 with some help from a falling dollar. Chart 2 shows the Goldman Sach Precious Metals Index hitting a new multi-year high. Precious metals got a boost from the Japanese yen which broke out to the highest level in four years.

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YEN RISES TO FOUR-YEAR HIGH... The Japanese yen closed over 95 today for the first time since 2000. The chart below shows that the yen bottomed during the second half of 1998 and has been forming a base ever since then. It formed a second bottom at the start of 2002 when the U.S. Dollar started to tumble. The yen is now moving up to challenge the late 1999 peak. Any close above that level would signal a new bull market in the Japanese currency. We'll soon see if the Japanese have abandoned intervention to keep the yen from rising. Needless to say, a new uptrend in the yen would be bearish for the dollar. A weaker dollar is bullish for precious metals and most commodity markets.

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FIRST QUARTER PERFORMANCE NUMBERS... With the first quarter coming to a close, it's interesting to see where the biggest gains have been during the first three months of the year. Size-wise, small caps were the best performers followed by mid caps. Large caps came in third. Sectorwise, the top performers were Energy, Consumer Staples, Financials, and Utilities. All of those groups are defensive in nature and reflect a new caution in the marketplace. Leadership by Energy is especially troublesome for the market since it implies higher energy prices. Industry-wise, the top performers were Oil Services, Biotechs, Brokers, Internet, Retailers, and Banks. Asset allocation-wise, commodities were the strongest asset class (+10%), bonds were second (+5%), stocks were third (1.4%). Over the last week, we've seen some rotations into some of the weaker industry groups like drugs, semis, and gold. Of those three, gold stocks look to have the best chance of making significant upside improvement. Those economists looking for crude oil to drop to $30 are overlooking the fact that commodity markets are in the midst of the biggest bull market in twenty years. That also bodes well for energy stocks.

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