USING PROFUNDS TO TRADE THE DOLLAR -- XAU INDEX BREAKS OUT TO RECORD HIGH -- OIL ETFS HIT NEW HIGHS AS NATURAL GAS BOTTOMS -- CORE CPI IS HIGHEST IN A YEAR
USING PROFUNDS TO TRADE THE DOLLAR ... With the U.S. Dollar continuing to drop toward its low for the year -- and the Euro hitting a new 2006 high today -- it's time to revisit two mutual funds that allow investors to trade the U.S. Dollar. As was the case with the Rising Rates Funds that I wrote about earlier in the week, these two dollar funds are part of the ProFunds family of mutual funds. The two funds allow you to take positions based on your opinions of which way the dollar is likely to trend. Recently the trend has been down. As a result of that weaker trend, the Rising US Dollar ProFund (RDPIX) has been falling as well. Chart 1 shows the RDPIX (through Tuesday) falling below its 200-day moving average by the widest amount this year. [It fell even further today]. That's a signal for dollar bulls to consider sales of that fund. That's because it will fall with the price of the U.S. Dollar Index. The second fund is a bet on a falling dollar. It's called the Falling US Dollar ProFund (FDPIX) and its shown in Chart 2. The falling dollar fund trades in the opposite direction of the Dollar Index. That means that it rises when the dollar falls. Chart 2 shows the FDPIX rising over its 200-day line earlier in the week after having bottomed last December. That's the first close over the 200-day line in eleven months. If you're bearish on the dollar, the Falling US Dollar ProFund is one way to put that view to work.
Chart 1
Chart 2
GOLD AND SILVER INDEX HITS RECORD HIGH... The falling dollar is keeping a strong bid under commodity markets and stocks related to those markets. Gold and silver prices climbed sharply again today. So did their stocks. Chart 3 shows the Gold & Silver (XAU) Index closing over its January high near 156. That's not all. The monthly bars in Chart 4 show the XAU also breaking through its 1996 and 1987 highs to reach a new record. That's a major bullish breakout and suggests that the metal rally is far from over. Crude hit another record high today. That helped push energy ETFs to new highs.
Chart 3
Chart 4
ENERGY ETFS BREAKOUT OUT TO NEW HIGHS ... With energy prices (including natural gas) on the rise and crude oil hitting a new record again today, energy stocks are soaring. The next two charts show the Energy Sector SPDR (XLE) and the Oil Service Holders (OIH) closing above their January highs. That puts both energy ETFs at record highs. Upside volume has also been supportive. The rising relative strength lines show that energy stocks started to show upside leadership in mid-March as prices started bouncing off their 200-day averages. Energy stocks were the day's strongest sector. I mentioned natural gas at the start of the paragraph because it's the one energy component that hadn't been rising. That's not the case anymore. Chart 7 shows natural gas futures closing at two-month high today. That's the first significant upturn in that commodity and can only serve to give another boost to an already strong energy sector.
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Chart 7
CORE CONSUMER INFLATION PICKS UP AS FED DECLARES INFLATION UNDER CONTROL... The March core CPI came in at +0.3% which was the biggest jump in consumer inflation in a year and much higher than economists expected. That pushed bond prices lower today and bond yields back over 5%. Which raises some interesting questions about the pre-occupation with whether or not the Fed is nearing the end of its rate hikes. Sooner or later, record high commodity prices have to start pulling inflation higher. Companies will have to start passing along their raw material costs or suffer accordingly. Most Fed members believe that inflation is well contained and is likely to stay that way. It's hard to understand how they can hold that view in the face of a falling dollar and soaring commodity prices. While the Fed controls short-term rates, long-term rates rise and fall based on inflation expectations. The Fed has little or no control over long-term rates which react to market forces. The recent jump in bond yields to four-year highs suggests that the bond market is concerned about inflation even if the Fed isn't. The Fed might do well to pay more attention to market action in the bond, commodity, and currency markets before declaring a victory over inflation. If anything, any halt in the Fed's rate hikes will only serve to weaken the dollar even further which would only add to inflation pressures and higher bond yields. At least that's the message I'm getting from today's intermarket reactions.
