BASIC MATERIALS AND CYCLICALS HAVE STRONG FRIDAY -- LEADERS ARE INDUSTRIAL METALS AND PAPERS -- FALLING DOLLAR MAY START BOOSTING COMMODITY PRICES
FALLING DOLLAR MAY BE HELPING COMMODITIES... During the two years prior to 2004, a falling U.S. dollar pushed commodity prices to the highest level in more than a decade. During the first half of this year, a rebound in the dollar has coincided with a downside correction in commodities. That may be changing. Chart 1 shows the dollar rally stalling near its 200-day moving average during May (see circle) and again during June (see red arrow), and showing signs of rolling over to the downside. On Friday morning, the announcement of a record first half account deficit pushed the dollar even lower. Right on cue, gold prices jumped nearly $7.00 and commodity-related basic material (and cyclical) stocks led Friday's market bounce. That may have to do with expectations that commodity prices are headed higher again. Chart 2 shows the CRB Index starting to find support just above its 200-day moving average. Its daily stochastic lines are in oversold territory under 20. Further weakness in the dollar -- and an upturn in the CRB -- would help commodity-related stocks.
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MATERIALS ETF BREAKS DOWN TRENDLINE... Chart 3 shows the Materials Select Sector SPDR moving above its March/April down trendline on Friday. Its relative strength line is also rising. Friday's upside volume was the heaviest in a month. All this points to a resumption of market leadership by this group of economically-sensitive cyclical stocks. This week's upside leadership was in industrial metals and paper.
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INDUSTRIAL METAL LEADERS... Three of Friday's top percentage gainers were industrial metals. Alcoa, Phelps Dodge, and US Steel all broke through their 50-day moving averages on rising volume. Their relative strength lines have also bottomed. That's the market's way of saying that it also expects higher aluminum, copper, and steel prices. Other basic material stocks are showing even more impressive long-term leadership.
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INTERNATIONAL PAPER HITS FOUR-MONTH HIGH ... International Paper has broken through its April high on rising volume. Its relative strength line has also risen to a new four-month high. That puts IP in position to challenge its first quarter peak near 46. The monthly bars in Chart 8 show why that level is so important. A close above 46 would represent a major bullish breakout by putting IP at the highest level in more than four years.
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ALLEGHENY TECHNOLOGIES HITS TWO-YEAR HIGH ... Another basic material leaders is Allegheny Technologies which reached a new two-year high today. The monthly bars in Chart 9 (shown in log scale) also show ATI breaking a down trendline extending back to 1999. That's a pretty impressive show of absolute and relative strength.
Chart 9
NUCOR EXCEEDS 1994 PEAK... The most impressive chart in the materials group belongs to Nucor. Chart 10 shows why. The steel stock broke through the 70 level today, which surpasses the prior peak reached as far back as 1994. Its relative strength line shows NUE outperforming the S&P 500 in the four years since 2000. The RS line is near an upside breakout of its own.
Chart 10
