STOCKS REACT FAVORABLY TO FED MOVE -- SO DO COMMODITIES AS DOLLAR SLIPS -- GASOLINE BREAKS OUT TO TEN-MONTH HIGH
GASOLINE LEADS COMMODITY MARKETS HIGHER ... Commodity markets rose again today. The most bullish action occurred in the gasoline pits. Chart 1 shows the continuous futures contract for unleaded gasoline breaking out to a new ten-month high. Crude oil rose another $1.35 to close at 73.50. That's within a couple of dollars of a new record high. Energy stocks were again the day's strongest sector as the Energy Sector SPDR (XLE) exceeded its 50-day moving average. It's one of the first markets to do that. Basic material and gold stocks also helped lead the market higher based on gains in gold and the CRB Index. [The Gold & Silver (XAU) Index rose more than 6% and was the day's strongest gainer]. Yesterday's Market Message showed gold, silver, and the CRB Index bouncing off their 200-day moving averages. They extended those gains today. Part of the reason was a selloff in the U.S. dollar. The wording of the Fed's statement accompanying the quarter point rate hike was interpreted as somewhat less hawkish on inflation than previous comments. That weakened the dollar, strengthened commodities, and gave a nice boost the stock market.
Chart 1
FOREIGN MARKE LEAD U.S. HIGHER ... Strong gains in foreign markets set a bullish mood even before the Fed announcement. Several Asian and European markets showed gains of 2% this morning. By day's end, foreign ETFs showed gains ranging from 3% to 6%. Part of that came from the drop in the U.S. dollar. Part of it was just buying of foreign stocks. Among the day's biggest ETF winners were Brazil (+6%), Emerging Markets (+4.3%), South Korea (+4.2%) and Germany (3.3%). Japanese iShares (EWJ) gained 3.2% to regain its 200-day moving average. Chart 2 shows the Dow Jones World Index closing back over its 200-day line for the first time in two weeks. Today's 2.3% gain in the DJW supported strong gains in the U.S. market.
Chart 2
MARKET INDEXES REGAIN 200-DAY LINES ... There were a number of positive market developments today. One was the rally in foreign markets. Another was new leadership by small caps and the Nasdaq market. That's been sadly missing over the last month. The most important development was the ability of most market indexes to close back over their 200-day moving averages. That was a necessary pre-requisite to any attempted summer rally. The Dow (which was the only major index to stay over its 200-day line), actually bounced off it yesterday. It closed right at its 50-day line (Chart 3). A close above it would extend its rally even further. Other major averages to close back over that long-term support line are the NYSE Composite, the S&P 500, and small and midcap indexes. Chart 4 is an equivolume chart of the NYSE Composite Index. Black rectangles represent up days while red rectangles are down days. Rectangle height is determined by the daily price range. Rectangle width is determined by daily volume. Heavier volume makes for wider rectangles. You can see that today's bullish rectangle is much wider than those shown over the last couple of weeks. The volume bars also show a noticeable pickup in trading activity on today's rally. That suggests institutional buying. If today's gains hold through tomorrow, it will also strengthen weekly indicators and, more importantly, prevent a major sell signal on the monthly chart.
Chart 3
Chart 4
WEEKLY INDICATORS IMPROVE ... Two of the negative weekly indicators that I've been showing recently have started to improve. Both are applied to the weekly S&P 500 bars in Chart 5. Weekly stochastic lines are starting to turn up from just above oversold territory at 20. The weekly MACD histogram bars are still deep in negative territory. However, they've reached the same oversold extremes that supported market bounces over the last two years. More importantly, they're starting to rise for the first time in two months. That suggests that the intermediate trend is stabilizing. [It's also justification for the covering of short (or bear) positions that I referred to yesterday]. Last Friday, I showed that the market needed to rally this week to prevent the first monthly MACD bear signal in three years. If the market can hold most of its gains tomorrow, that major sell signal will have been averted.
Chart 5
TIME FOR A SUMMER BOUNCE... In yesterday's Market Message, I mentioned the tendency for the market to attempt a summer rally at the start of July. That also gives some seasonal support to the market over the next month. However, seasonal trends then turn negative into the autumn. If the four-year cycle works again this year, a major buying opportunity should present itself during October. While acknowledging that short- to intermediate-term momentum appears to be shifting to the upside, I suspect that there's more danger ahead after the summer bounce has run its course. If today's action is any indication of things to come, commodities and their related stocks appear ready to reassert their former leadership. That may help stocks over the short-run, but will create more inflationary problems in the long run both for the market and the Fed.
HAPPY FOURTH OF JULY... I'll be traveling tomorrow to attend a family wedding. So I won't be writing a Market Message tomorrow (Friday). But I doubt that things will change too much before the end of the week. The real key will be whether or not the market is able to build on today's impressive gains. July is usually the strongest month of the third quarter where most of the summer rally is concentrated. That may be enough to put everyone in a better mood as we approach the celebration of Independence Day. On that note, I'd like to take this opportunity to wish everyone a safe and happy Fourth of July weekend.
