DOLLAR RALLY CAUSES SELLING OF BASIC MATERIALS AND CANADA AS COMMODITIES DROP

MORE DOLLAR BUYING ... As the dollar continues the new year rally, foreign currencies continue to weaken. The Euro is moving down for a test of its December low and its 50-day average. Its daily MACD lines have issued a short-term sell signal (Chart 1). The Japanese yen is already threatening its 50-day line after backing off its early December high (Chart 2). The Canadian Dollar is back below its 50-day line (Chart 3). The dollar rally continues to put downward pressure on gold and most commodity markets. The CRB Index is down over 3.00 points today with 13 of its 17 commodities in the red. The biggest loser is copper which is falling 9%. As a result, gold stocks and basic materials are being sold again today. Newmont Mining and Phelps Dodge are two of the biggest mining losers.

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NEWMONT AND PHELPS DODGE BREAK MOVING AVERAGES... Today's big drop in copper is taking a toll on Phelps Dodge. The big copper producer has fallen below its 50-day average on rising volume. Its next test of support will take place at the rising support line drawn under its October/December lows. Its relative strength line appears to have formed a "triple top" since October which is a negative sign. In the gold area, Newmont Mining (which is the biggest stock in the XAU Index) is trading under its 200-day moving average. Yesterday's price drop came on especially heavy volume. Chart 6 shows the XAU Index threatening its 200-day line. Gold shares are leading bullion lower which, in turn, provided an early clue of a dollar rally.

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BASIC MATERIALS LOSING LEADERSHIP ... When commodities are on the defensive, basic material stocks suffer accordingly. Today they're the day's weakest market sector. The daily chart of the Materials Select Sector SPDR (XLB) is threatening its 50-day average. The daily MACD lines have already turned down. And their relative strength line, which peaked in late November, has fallen to a two-month low. That seems to be confirming that, for the time being, money is coming out of commodity-related stocks.

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COMMODITY DROP HURTING CANADA... Rising commodity prices over the last year helped to make Canada one of the top global stock markets. The recent commodity drop, however, is having the opposite effect. Percentage-wise, Canada iShares are off 2% today and one of the worst global performers. Chart 8 shows the Canada iShares (EWC) slipping under its 50-day average after backing off from its early December peak. The daily MACD lines are negative. Chart 9 is a ratio of the EWC to the Dow Jones World Index that I plotted yesterday. After leading the DJW higher all year, Canada has been underperforming since the start of December. That's being caused partially by the recent drop in commodities and the Canadian Dollar. As I suggested yesterday, I believe that a global rotation is taking place out of some of last year's former leaders into some 2004 laggards. Or, put another way, rising commodities last year helped natural resource exporters (like Canada) and hurt importers (like Japan). With commodities on the defensive in the new year, money is moving out of the exporters and into the importers. Chart 10 is a ratio of the Japan iShares (EWJ) divided by Canada iShares (EWC). Canada did much better than Japan through most of 2004. The rise in the ratio during December, however, shows Japan gaining on Canada.

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