DOLLAR FALLS TO NEW 20-MONTH LOW -- THAT'S BOOSTING COMMODITIES AND FOREIGN STOCKS -- JAPANESE STOCKS ARE FINALLY BOUNCING -- TEN-MONTH LOW IN BOND YIELDS IS HURTING BANKS -- BUT HELPING HOMEBUILDERS

DOLLAR PLUNGE BOOSTS COMMODITY ASSETS ... As you well know by now, a falling dollar boosts commodity prices and precious metals in particular. The U.S. Dollar Index has fallen to another 20-month low today (the British Pound is trading at the highest level in 14 years). And, not surprisingly, commodity prices are rising. Gold and Silver prices are trading sharply higher again today. Chart 1 shows the Gold & Silver (XAU) Index having exceeded a six-month down trendline. Precious metal assets remain on a buy signal. Energy prices rose to the highest levels in two months yesterday and caused upside breakouts in energy ETFs. Chart 2 shows the Oil Service Holders (OIH) trading back over their 200-day moving average. The Energy SPDR (XLE)has broken out to a new record high. Commodity prices in general are rising. On Tuesday I showed two commodity mutual funds that appeared to have bottomed. Another way to participate in the general price advance is through the DB Commodities Tracking Fund (DBC) in Chart 3 which is rising as well. Chart 4 shows that the commodity ETF remains on a series of point & figure buy signals that started during October. All three commodity-related markets are starting to outperform the S&P 500.

Chart 1

Chart 2

Chart 3

Chart 4

FALLING DOLLAR ALSO BOOSTS FOREIGN STOCKS ... Another side effect of a falling dollar is that it drives money into foreign markets. We're starting to see some early effects of that in stronger foreign stocks. I've shown the next chart before, but it needs updating. The green line is the US Dollar Index. The red line is a ratio of the Europe Australia and Far East (EFA) ETF divided by the S&P 500 SPDR (SPY). There's an inverse correlation between the two lines. When the dollar starts to rise (May and June), foreign stocks underperform the U.S. (the ratio falls). When the dollar peaks, foreign stocks do better than the U.S. and the ratio rises. That happened during the spring and, most recently, during October. The chart shows that the EFA/SPY ratio has broken a six-month down trendline. That's another reason why a falling dollar is causing some profit-taking in the U.S. market.

Chart 5

JAPAN IS STARTING TO RISE... The Asia region has been the strongest in the world -- with the glaring exception of Japan. I did a recent story suggesting that the Japanese market was tied to a correcting gold market (because of Japan's battle with deflation). With gold rallying impressively, it's time to see if Japan is benefiting accordingly. It seems to be. Chart 6 shows the Japan iShares (EWJ) jumping over 1% today. [The Nikkei 225 gained 1.23% (198 points) overnight and was the world's strongest equity market]. The daily bars in Chart 6 show the EWJ moving up toward its recent highs. The solid line is a ratio of the EWJ to the EFA (EAFE Index). Notice that Japan has started to outperform that global index for the first time in months. The point & figure chart of the EWJ in Chart 7 has just registered an initial buy signal. A close over 13.99 would be more bullish. Japan iShares are getting an added boost from a rising yen. That's because the ETF is quoted in a depreciating dollar. Chart 8 shows the Japanese yen trading at a four-month high and is back over its 200-day average today.

Chart 6

Chart 7

Chart 8

FALLING BOND YIELDS ARE HURTING BANKS... One of the reasons the U.S. currency is falling is the sharp drop in U.S. bond yields. That's narrowing the spread between U.S. bond yields and foreign yields which is bad for the dollar. Today's plunge in bond yields follows on more news of economic slowing. The daily bars in Chart 9 show the 10-year T-note yield falling below 4.5% for the first time since January. That's pushing bond prices higher (bond prices rise as yields fall). Normally, falling rates boost rate-sensitive stock groups. That doesn't necessarily include banks however. That's because bank earnings are hurt when the yield curve is inverted -- as it is now. Banks pay out short-term rates and lend at long rates. They get hurt when bond yields fall too far below short-term rates. Chart 10 shows the Bank Regional Holders (RHK) falling below their 50-day average. The line on top of Chart 10 is a ratio of the RKH to the S&P 500. Notice that the bank relative strength line has followed the trend of bond yields lower since August. By contrast, one interest rate-sensitive group that's benefiting from falling rates is homebuilders.

Chart 9

Chart 10

Chart 11

HOUSING INDEX EXCEEDS 200-DAY AVERAGE... Chart 11 shows the PHLX Housing Index (HGX) bottoming during August shortly after bond yields started to drop (and just as bank stocks started to weaken). Chart 11 also shows that the HGX is trading back over its 200-day average for the first time since April. Strange as it may sound, the rising RS line shows that home -builders have been market leaders during November. As further evidence of that, today's 9.5% gain in Pulte Homes makes it the day's biggest percentage gainer in the S&P 500. Chart 12 shows the homebuilder climbing over its 200-day line on rising volume. Three other S&P leaders are Horton (+6.5%), KB Home (+6.2%), and Lennar (5.9%). All three are back over their 200-day averages.

Chart 12