FED MINUTES SPARK RALLY AS MARKET INDEXES BOUNCE OFF 50-DAY LINES -- FALLING DOLLAR AND SURGE COMMODITIES SUGGEST INFLATION BATTLE IS FAR FROM OVER
2:00 RELEASE BOOSTS MARKET ... The minutes of the Fed's December meeting carried wording that future rate hikes would probably not be large and that inflation pressures were well contained. That hint that the Fed might be near the end of their tightening campaign turned what had been a listless market into a rising one. Technically, today's news came just in time. The following charts show why. All of the major stock indexes -- the Dow, the S&P 500, and the Nasdaq -- experienced upside reversal days at their 50-day moving averages. Those three indexes also bounced off chart support along their August/September highs. And they did so on rising volume. The market may have also gotten some late support from foreign stock markets saw gains of more than 2% on the day.
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DOW BOUNCES OFF 10,700... Chart 1 shows the Dow Industrials bouncing off their 50-day moving average and chart support along the August/September highs near 10,700. [The Dow did, however, hit a one-month low intra-day which triggered a short-term point & figure sell signal. In my opinion, however, the afternoon upside reversal negated that down signal]. Chart 2 shows the day's upside reversal in the Dow Diamonds (DIA) on rising volume. Charts 3 and 4 show similar upside reversals in the S&P 500 and the S&P 500 SPDRS (SPY). Both stayed above their 50-day lines and their August/September highs. Chart 4 shows that today's bounce came on rising volume in the SPY. The Nasdaq also had a strong day.
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NASDAQ INDEXES SCORE UPSIDE REVERSAL ... The market usually doesn't do much on the upside without help from the Nasdaq market. And it got that today. In fact, the Nasdaq scored a bigger percentage gain than the Dow or the S&P 500. Chart 5 shows the Nasdaq Composite Index bouncing impressively off its 50-day line. It's also back over its early August peak. Trading volume expanded. Chart 6 shows even stronger chart action in the Nasdaq 100 Shares (QQQQ). That index of the largest non financial Nasdaq stocks bounced off its early August peak just above 40 and its 50-day line. It also did so on the heaviest volume in weeks. The Nasdaq 100 scored the day's biggest percentage gain of the major stock indexes (+2.1%). Today's market gains erased most of the late-December chart damage and may be hinting at a stronger start to the new year. It's not the start of the year that I'm concerned about. It's what happens after January ends and seasonal trends start to weaken. That's why January is historically one of the best months of the year to take some profits.
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INFLATION BATTLE MAY BE JUST STARTING... While the stock market bounced today, the dollar fell sharply and commodity prices soared. Oil rose more than $2 while gold gained $14. [Please see my earlier message on the gains in gold and oil stocks as well as the Canadian stock market (January 03, 2006)]. That seems a strange reaction to a Fed announcement that suggests that its battle against inflation is nearly over. Today's commodity surge suggests that the inflation battle may be heating up. Chart 7 shoes the CRB Index jumping over 4 points today after recently bouncing off its 50-day moving average. The rising relative strength line shows that commodities have started to outperform the S&P 500 again. Two things work against the secular bull market in commodities. And both things are linked. One is rising interest rates and the other is a rising dollar. One of the reasons the Fed has been rising rates for the last eighteen months is to head off the inflation threat from rising prices. That tightening campaign boosted the dollar against most foreign currencies. Today's suggestion that the Fed is nearly done raising rates weakened the dollar and helped push commodity prices sharply higher. Chart 8 shows today's strong bounce in the Euro. [The long-term chart of the U.S. Dollar index also looks toppy]. A weaker dollar may only intensify money flows into commodity-related stocks like gold and oil. A weaker dollar would boost import prices which would make it easier for American companies to pass along their rising material costs to American consumers. The Fed governors may think they've won the inflation battle. The commodity and currency markets obviously don't think so. Today's optimism surrounding the Fed's December minutes may prove to be short-sighted and short-lived.
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