DOW HITS RECORD HIGH - ECONOMIC NEWS SINKS BONDS - INTEREST RATES SURGE - STOCKS VERSUS RATES - HOUSING STOCKS STALL - GOLD GAPS HIGHER

DOW MAKES IT SIX STRAIGHT......

NOTE: Today's update is provided by Arthur Hill of TDTrader.com.

Barring a 280 point decline on Friday, the Dow is set to close higher in December and finish the year with a bang. The Dow is now up 6 consecutive months and it will mark the second time in 10 years that the Dow performed this feat. The first time occurred in 2003. For the year, the Dow advanced 10 of the last 12 months and 2006 is shaping up as a truly banner year for blue chips.

Chart 1

The only negative is the overbought condition of the current advance. Think about it for a moment. Over the last 10 years, the Dow advanced 6 consecutive months twice, 5 consecutive months once and 4 consecutive months twice. The Dow has never advanced more than 6 consecutive months in the last 10 years. While seven consecutive months is certainly possible, the odds favor a consolidation or correction early next year.

Over the last 10 years, the longest decline lasted six months and this occurred in 2002. Other than that, the Dow declined 3 consecutive months three times and the remaining declines lasted 1-2 months. That is a pretty good track record over a 10 year stretch. Given this performance record, the odds favor a 1-3 month decline or consolidation early next year.

Chart 2

BONDS REACT TO CONSUMER CONFIDENCE...... The Conference Board reported that its index of consumer confidence rose to 109 this month. Economists estimate that consumer spending accounts for 2/3 of GDP and a boost in confidence is good for spending. Evidence of economic strength puts pressure on the Fed to keep interest rates steady or raise rates and the bond market reacted negatively. The iShares T-Bond Fund (TLT) moved below 89 and broke its 50-day moving average over the last two days. This is the most weakness we have seen in bonds since May and the bears are gaining the upper hand. It would take a surge back above the 50-day and above the mid December high to revive the bullish case.

Chart 3

INTEREST RATES SURGE...... Bonds and interest rates move counter to one another. Bonds rise as interest rates fall and bonds fall as interest rates rise. The December decline in bonds translates into a rather sharp rise in interest rates this month. The 10-year T-Note Yield bottomed around 4.4% at the beginning of the month and surged above 4.7% today. The move was enough to break the 50-day moving average and the stock market may have to deal with even higher interest rates in 2007.

Chart 4

RATES VERSUS STOCKS...... The potential for higher rates is a concern because stocks benefited from falling interest rates over the last six months. On Chart 5, the 10-year T-Note Yield peaked above 5.2% in late June and declined to 4.4% in early December (left scale). During this timeframe, the S&P 500 bottomed in mid June and hit a multi-year high in December (right scale). Lower interest rates have clearly been good for stocks over the last six months. The S&P 500 kept up its part of the bargain with further strength in December. However, the 10-year T-Note Yield deviated sharply in December and this could haunt the S&P 500.

Chart 5

HOME BUILDERS WATCHING RATES TOO...... The Homebuilders SPDR (XHB) also benefited from the decline in rates over the last six months. The ETF bottomed a few weeks after rates began to fall and advanced through the decline in rates. Rising rates may be taking their toll already as XHB stalled in December and did not follow the S&P 500 higher this month. The first signs of underperformance and interest rate sensitivity are starting to appear. As far as a trend change, look for a move below the 50-day moving average and the September trendline.

Chart 6

GOLD GAPS HIGHER...... The StreetTracks Gold ETF (GLD) gapped higher for the second time in four days and the move solidifies support in the low 60s. The 200-day moving average, 50-day moving average and broken resistance mark support in this area. The December decline formed a falling flag and these are typical for corrections. The gaps and flag breakout over the last few days reinforce support and signal a continuation of the October-November advance. In addition, the 50-day moving average crossed back above the 200-day moving average for a golden cross. The bulk of the evidence is shifting back to the bulls and the bulls are in good shape as long as GLD holds above 60.

Chart 7