COMMODITIES TURN UP AS DOLLAR WEAKENS -- REVIEW OF LONG-TERM INDICATORS -- AUGUST ISN'T USUALLY A GOOD MONTH
US DOLLAR IS ROLLING OVER ... Recent reports of economic weakening, combined with diminished expectations for additional rate hikes by the Fed, are causing selling in the dollar. Chart 1 (plotted through Tuesday) shows the U.S. Dollar Index starting to roll over to the downside over the last week. The rally fell short of the January low at 87.83 (and its 200-day moving average) which kept its 2006 downtrend in intact. One of the usual side-effects of a falling dollar is higher commodity prices -- and gold in particular. And that's just we're seeing.
Chart 1
CRB INDEX TURNS UP ... Following another successful test of its 200-day moving average in late July, the Reuters/Jefferies CRB Index is climbing again. It's up 4.50 points today with 14 of its 19 component commodities in the black. Some of the biggest gainers are natural gas, coffee, silver, gasoline, nickel, corn, heating and crude oil. Gold and copper are also gaining ground. Energy stocks are still benefiting from rising crude and natural gas prices. Precious metal stocks are rallying as well. The CRB/SPX ratio continues to rise which shows that commodities are still offering a stronger alternative to stocks.
Chart 2
SILVER LEADS PRECIOUS METALS HIGHER ... Silver is leading the precious metals group higher. Chart 3 shows the iShares Silver Trust (SLV) breaking out to a new-two month high. The StreetTracks Gold Trust (GLD) isn't far behind. For those that follow it, the Parabolic SAR system gave another short-term buy signal yesterday. [The GLD still needs to reach 65.75, however, to give a weekly SAR buy signal]. Precious metal stocks have been moving up as well. Chart 5 shows the AMEX Gold Bugs Index stocks challenging its July peak. Its relative strength ratio (versus the S&P 500) has been climbing since mid-June. Chart 6 shows Freeport McMoran Copper & Gold also moving up toward its July high. It was one of the bigger percentage gainers in a basic material group which was one of today's strongest sectors.
Chart 3
Chart 4
Chart 5
Chart 6
JULY MONTHLY INDICATOR ENDS NEGATIVE ... Last month I wrote about a preliminary sell signal given by the monthly MACD histogram for the S&P 500. Despite the strong rally during the last week of that month, the MACD lines ended the month in negative territory (although by a narrow margin). That's why the monthly S&P 500 bars in Chart 7 carry a mixed message. The bad news is that monthly MACD lines are negative for the first time in more than three years. The good news is the S&P has bounced off the 20-month (or 400-day) moving average (blue line), which has kept its long-term uptrend intact. At the end of July, the major stock indexes that ended with monthly MACD sell signals were the Nasdaq market, the S&P 500, the S&P 400 MidCap Index, and the S&P 600 Small Cap Indexes. Weekly indicators are also negative, but continue to improve for the S&P 500.
Chart 7
WEEKLY INDICATORS IMPROVE ... Although the monthly MACD lines remain negative, the weeklies continue to improve. The fact that the blue histogram bars in Chart 8 are contracting means that the two MACD moving averages are moving closer together. That means that selling pressure has diminished and, as I suggested last week, many traders take that as justification to start covering short positions. To give a buy signal, however, the histogram bars have to cross over the zero line. That happens when the black MACD line crosses over the red. That hasn't happened yet. The weekly stochastic lines have turned up from oversold territory near 20. That's also supporting the short-term rally. One piece of negative news is that the blue 10-week moving average is still trading below the red 40-week. That's another sign that the current rally may not be as strong as looks on the surface. Which means that market indicators are somewhat mixed at this point in time. At such times, it's usually best to keep a cautious attitude until most of the indicators are moving in the same direction.
Chart 8
AUGUST IS NOT A GOOD MARKET MONTH ... The fact that the market rallied during July isn't that surprising. The bulk of the summer rally usually takes place during that month, which is traditionally the strongest month of the third quarter. Unfortunately, seasonal trends turn weaker during August. According to the 2006 Stock Trader's Almanac, August has become the worst S&P month in the past 18 years, and the second worst month for the Dow and the Nasdaq. [September is the worst month overall]. The good news is that this is a mid-year election year which usually sees major bottoms formed during October. Although the market has started August on a firmer note price wise, volume hasn't been impressive. Besides being light overall, there's been more volume on down days than up days. That's not a sign of a rally with strong legs. The major wild card at this point appears to be the Fed. We'll know more about its rate policy by this time next week. In the meantime, the best trading strategy might be to get outdoors and enjoy the summer (but stay cool).
