FALLING BOND YIELDS HURT DOLLAR, BOOST GOLD STOCKS -- BROKERS CONTINUE TO PLAY CATCH UP -- HOW TO PLOT RELATIVE STRENGTH RATIO LINES

LONG-TERM RATES FALL IN FACE OF FED TIGHTENING ... The Fed raised the Fed funds rate another quarter of a point today as everyone expected. They also left their wording pretty much intact. That set in motion some intermarket relationships that may not make sense at first blush. For one thing, gold stocks surged as did most commodity markets. Oil stocks surged as well. The key seems to lie in the Fed's statement that inflationary pressures had abated. The bond market likes that. As a result, bond prices rose and bond yields fell. Falling yields pushed the dollar into a sharp decline against the Euro. The falling dollar pushed gold prices $3 higher and made gold stocks the day's biggest percentage gainers. The CRB Index jumped 3.86 points as 13 of its commodities rose. Financial stocks benefited from the fall in rates along with some positive brokerage earnings. Chart 1 shows the 10-year Treasury note dropping to another six-month low. When yields fall, so does the dollar. When the dollar falls, the Euro rises. Chart 2 shows the Euro scoring a big gain against the dollar today. Chart 3 shows the AMEX Gold Bugs Index breaking through its 200-day moving average for the first time in five months. [Please see my earlier update on commodity prices and the bullish outlook for the Gold (XAU] Index.

Chart 1

Chart 2

Chart 3

BROKERS HAVE STRONG DAY ... I recently talked about the brokers starting to play catch up in a financial sector that had already exceeded its summer highs. They took another big step today. The brokerage index gained over 2% and was one of the day's leaders. Chart 4 shows the Broker/Dealer Index moving close to a challenge of its 200-day moving average and chart resistance at the June high. The relative strength line has been rising since mid-July. With other financial stocks (like the banks) leading the way, it's just a matter of time until the brokers achieve a bullish breakout of their own. Two of today's brokerage stars were Goldman Sachs and Lehman Brothers. LEH broke through its 200-day line and reached a new five-month high. Goldman Sachs appears to be on the verge of doing the same. Today's high volume bodes well for both stocks and the entire group. That's normally a good sign for the rest of the market as well.

Chart 4

Chart 5

Chart 6

INDIVIDUAL BREAKOUTS ... The following two stocks caught my eye today. That's because both achieved bullish breakouts. In a strong banking group, JP Morgan resumed its uptrend and reached a new five-month high. Over on the Nasdaq, Juniper Networks broke through its July high to also reach a new five-month high. Both stocks rose on good volume and are showing good relative strength. That's a bullish combination.

Chart 7

Chart 8

NASDAQ 100 TOUCHES 200-DAY AVERAGE ... The Nasdaq 100 touched its 200-day moving average today, but hasn't closed above it yet. As I've said before, an close above that line would give a big boost to the Nasdaq and the market in general. It's relative strength line has also been rising lately which is another positive sign.

Chart 9

HOW TO PLOT A RATIO LINE ... You can plot a ratio by simply going to the indicator window on the Stockcharts menu and clicking on "price relative". That will plot a ratio of any price versus the S&P 500 along the bottom of the chart -- as shown in Chart 9. You can change the default S&P to any other index if you wish. There's also a way to plot a ratio separately. All you have to do is plot two symbols with a : in between the two as shown in Chart 10. The two symbols used in Chart 10 are $NDX:$SPX, which is the Nasdaq 100 divided by the S&P 500. Then change the chart from a "bar" to NAV and you'll see the following ratio line. This example puts the 50- and 200-day moving averages on the ratio line itself. You can apply any other indicator as well -- although I generally use just moving averages and trendlines. The ratio shows a small "double bottom" forming during August and September followed by an upside penetration of the 50-day line. That means that the NDX is starting to outperform the S&P, which indicates that money is finally starting to flow into the technology sector. Nasdaq leadership, if it continues, is also a good sign for the rest of the market. Turns in the ratio lines are pretty easy to spot and are especially helpful in spotting and implementing sector rotation strategies.

Chart 10

RAMAPO COLLEGE SPEECH ... I'm be giving a speech at Ramapo College of New Jersey this Thursday evening from 6 pm to 8 pm. My topic will be Intermarket Analysis. Attendance is free. Any of you in the New Jersey area who wish to attend can register here. Campus map and directions can be accessed here.