MARKET HAS SECOND THOUGHTS ABOUT FED BEING DONE -- THAT'S BOOSTING THE DOLLAR AND CAUSING PROFIT-TAKING IN GOLD -- SMALL CAP GROWTH IS STILL THE WEAKEST GROUP

STRONG RETAIL NUMBERS AND IMPORT PRICES ... The market is having second thoughts about the Fed being done with its rate hiking. A strong retail report today and a big jump in import prices suggest that the economy and inflation may be a little stronger than expected. I agree with the latter part, but not the former. I do believe that inflation numbers are more entrenched than the Fed believes which will eventually lead to higher rates. I'm not convinced that the economy is that strong. The market took the two pieces of news badly today and continued the downward erosion that started last week. Most of the damage was done in the housing area, consumer discretionary stocks, and transportation. Airlines plunged 10% to undercut their summer lows (Chart 1). Basic materials also had a bad week. The only area to gain ground was consumer staples, the most defensive group of all. Other defensive groups that help up better than the general market were healthcare, utilities, and energy. The dollar bounced late in the week, partially owing to a drop in the nation's trade deficit and the growing belief that the Fed may need to hike some more before the year is out. That caused profit-taking in gold and silver as well as their relates shares. Commodity prices ended the week lower.

Chart 1

GOLD FALLS WITH THE EURO... When the dollar rises, the Euro usually falls. The same is true with gold. Therefore, the Euro and gold usually trend in the same direction. Although the daily chart of the Euro (Chart 2) and the Gold ETF (Chart 3) aren't exactly the same, their peaks and troughs show a strong correlation as does their general direction. Both had been rallying together since mid-June (as the dollar fell). Chart 2 shows the Euro falling on Thursday and Friday and backing off from chart resistance along its summer high. No serious chart damage was done, but it was enough to cause profit-taking in precious metals. Chart 3 shows streetTracks Gold Trust Shares (GLD) falling both days as well. And on rising volume. The Silver ETF did the same. No serious chart damage was done to either metal, but it kept GLD in a short-term trading range. When I showed the Gold & Silver (XAU) Index on Wednesday, it was challenging its July peak near 150. I thought it might get through it. The bounce in the dollar, however, prevented that from happening. Although my long-term view on precious metals remains bullish, this week's selling forces me to shift to a more neutral view on the short-term trend. The GLD and the XAU are now in a trading range between their July highs and July lows (horizontal lines). In my view, the longer-range odds still favor the upside. Any break below the July lows by either market, however, would be cause for concern.

Chart 2

Chart 3

Chart 4

SMALL CAP GROWTH HITS NEW LOW ... I recently wrote an article about small caps doing much worse than large caps and small cap growth being the weakest group (and large cap value being the strongest). It comes as no surprise then to see that the Russell 2000 Growth iShares (IWO) was the weakest ETF for the week and has already undercut its June low. That contrasts with the Russell 2000 iShares (IWM) shown in Chart 6 which are still trading above their June/July lows. Unfortunately, that's not all that encouraging. The two converging trendlines drawn on Chart 6 have the look of a "descending triangle" which is usually a bearish pattern. [In a descending triangle, the upper line declines while the lower line is flat. That means that sellers are more aggressive than buyers]. A new low by the small cap index would be another sign of weakness for the rest of the market.

Chart 5

Chart 6