GE LEADS DOW LOWER -- A PLUNGING DOLLAR PUSHES COMMODITY PRICES SHARPLY HIGHER AND THE STOCK MARKET LOWER -- $70 OIL PUNISHES AIRLINES AND RETAILERS
FOREIGN CURRENCIES JUMP AGAINST DOLLAR... The U.S. dollar fell sharply today against all of its major trading partners. Once again, the main impetus came from another Chinese voice calling for a reduction in that country's holdings of U.S. assets. Chart 1 shows today's explosive upward gap in the Euro which puts it in place to challenge its January high just above 1.23. You may recall our article on April 5 which suggested that an upside breakout was likely after a short-term pullback. We've had the short-term pullback. Other foreign currencies that gained more than 1% against the dollar are The British Pound (+1.1%), the Australian Dollar (+1.4%), and the Swiss Franc (+1.6%). When the dollar falls, commodity prices usually rise. In this case, commodity gains matched the scale of the dollar drop. Gold prices shot up $18 to a new 25-year high of $619. The CRB Index rose 5.51 points to end near 348. Chart 2 shows the Reuters/Jefferies CRB Index nearing a challenge of its January high near 350. Notice the similarity between the two charts. Thirteen of the nineteen commodity markets rose. The top five percentage gainers were natural gas, silver, gold, copper, and gasoline. Crude oil rose 88 cents to close over $70 for the first time in eight months. That gave a big boost to basic material, precious metals, and energy stocks. But it weakened the rest of the market. Two of the hardest hit groups were energy-related and they were airlines and retailers.
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$70 OIL PUNISHES AIRLINES ... Rising energy prices usually cause selling in airlines. And with crude topping $70 today, the airlines were hit especially hard. The AMEX Airline Index fell over 5% and was the day's weakest group. The daily chart shows the XAL bearing down on its 200-day moving average. Some of the biggest losers in the Dow Transports today were JetBlue, Continental, AMR, and Southwest Airlines. JBLU fell to a new 52-week low while the other three broke their 50-day moving averages. Chart 4 shows LUV descending beneath its 50-day line on rising volume. Not a good combination.
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HOME DEPOT LEADS RETAIL ETF LOWER ... Retailers are also being hurt by rising energy prices. Chart 5 shows the Retail Holders (RTH) threatening its 200-day moving average. Its relative strength line shows sub par performance by the retail group since last November. The rally attempt that started in February has been short-circuited by the energy price surge. That's understandable since higher gasoline prices make it more expensive to drive to the shopping mall and also cut into disposable income. The biggest reason for the today's retail selling was Home Depot. That's because it's the biggest holding (40%) in the RTH. Chart 6 shows HD breaking its 200-day line today.
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GENERALS LEAD DOW IN THE WRONG DIRECTION... Last Tuesday I warned that the Dow and the S&P 500 had broken support lines drawn under their first quarter lows. Today both market indexes closed beneath their 50-day moving averages. For the Dow, that's the first time that's happened in more than two months. That doesn't come as too much of a surprise considering that the Dow's daily MACD lines have been negative for the last three weeks. A glance at today's Dow leaders and laggards shows where the problem lies. Two of the day's strongest Dow stocks were Alcoa and Exxon Mobil which reflected rising aluminum and energy prices. That helps explain why Home Depot was the Dow's biggest percentage loser (-1.8%). Two other big Dow losers were General Motors (-1.6%) and General Electric (-1.7%). Because of its large size, GE was the more damaging. Chart 8 shows GE falling beneath both moving average lines on rising volume. It's relative strength line shows that GE hasn't given much support to the Dow throughout 2006. Then again, neither has General Motors. It looks like the two "Generals" are leading, but in the wrong direction.
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