COMMODITIES ARE OVERSOLD AND BOUNCING -- SO ARE STOCKS TIED TO COMMODITIES -- THE DOLLAR PULLS BACK FROM 200-DAY LINE -- BOND YIELDS REACH TWO-MONTH HIGH -- UPSIDE TARGETS FOR THE NASDAQ AND S&P 500
COMMODITY TRACKING FUND BOUNCES OFF CHART SUPPORT ... Commodities have been the weakest asset class over the last half year. Since last May, the Reuters/Jefferies CRB Index has lost 20%. Most of those losses, however, have come from the energy sector (with crude oil losing 30%). Smaller losses of 10% and 13% were seen in industrial and precious metals respectively. Agriculture actually gained 10%. That suggests that the plunge in crude oil has greatly exaggerated the weakness in the commodity group. [The old CRB Index (CCI), which contains a much smaller energy weight, has lost only 5% of its value]. Even so, technical readings suggest that commodities (including oil) are due for a rally attempt. Chart 1 shows the DB Commodities Tracking Index Fund (DBC) bouncing 2% today off potential chart support at its September/October low. The 9-day RSI line is also bouncing from oversold territory below 30. That suggests to me that the selling of commodities (and their related stocks) has been overdone. The fact that commodity-related stocks are leading the market higher today is another hint of oversold commodities.
Chart 1
OVERSOLD COMMODITY STOCKS ARE BOUNCING ... One of the supportive factors behind the market rally over the past couple of days has been renewed buying of commodity-related stocks. They had been the main drags on the major market indexes over the last month. Chart 2, for example, shows the Materials SPDR (XLB) climbing more than 1% today after reclaiming its 50-day average on Thursday. [Three of the day's biggest XLB gainers were Freeport McMoran Copper & Gold, Newmont Mining, and US Steel. Alcoa gained 7.4% on the week]. Its relative strength line has also started to climb (see arrow). Precious metal stocks are up more than 2% today. Chart 3 shows the PHLX Gold & Silver (XAU) Index bouncing off its November low. Its RS line is bouncing as well (as are the two commodities). Energy stocks are the day's strongest sector. Chart 4 shows the Energy SPDR (XLE) climbing more than 2% and trying to regain its 200-day moving average. The daily stochastic lines appear to be turning up from oversold territory below 20. [Crude oil bounced a dollar on Friday, gold climbed $12, and most commodity prices climbed. The CRB Index gained 4.64 points to end the week on an upnote].
Chart 2
Chart 3
Chart 4
OVERBOUGHT DOLLAR BACKS OFF FROM 200-DAY LINE ... Part of the recent commodity selling can be attributed to a bouncing dollar. Chart 5, however, shows that the U.S. Dollar Index is in a short-term overbought condition (see RSI line) and is backing off from potential resistance near its 200-day moving average (red arrow). At the same time, the Euro is bouncing from potential chart support at 129 and is in an oversold condition (Chart 6). The direction of the dollar will play a big role in determining the direction of commodities (and gold in particular). If commodities are going to regain any upside traction from current levels, they're going to need some help from a softer dollar.
Chart 5
Chart 6
BOND YIELDS ARE CLIMBING ... Bond yields continued to advance. The 10-year T-note yield (TNX) ended the week at 4.77% which is the highest yield in two months. [That means that bond prices fell]. Signs that the economy may be stronger than expected (stronger retail sales and a drop in unemployment claims) are reducing hopes for a Fed easing anytime soon. Over the short run, that's helping stocks since it implies stronger earnings. Any move by the TNX over its October high, however, near 4.85% might cause some nervousness among stock investors. Utilities have come under pressure because of rising bond yields (Chart 8).
Chart 7
Chart 8
DOW THEORY IS BACK ON TRACK ... A few weeks back I wrote a piece on the Dow Theory because of the fact that the Dow Transports had fallen below their 200-day moving average. That type of divergence between the industrials and the transports can lead to problems for the latter if it continued. Fortunately, it didn't. The Dow Transports regained their 200-day line in the middle of the previous week which alleviated some Dow Theory concerns. The TRAN ended the week north of its 50-day line. [Most of the gains came from the airlines]. This week's upside breakout in the transports now puts both averages back on track.
Chart 9
Chart 10
NEXT MAJOR UPSIDE TARGETS ... There were a lot of improvements in the market's short-term picture this week. In my view, the most important was the upside breakout in the Nasdaq market to the highest level in six years. The monthly bars in Chart 11 show the Nasdaq Composite closing over 2500 for the first time since the start of 2001. One way to arrive at the next potential upside target is with percentage retracement lines. Those lines are measured from the 2000 top at 5132 to the 2002 bottom at 1108. Normally, a market uptrend will retrace at least 38% of its prior decline. That would put the next Nasdaq target around the 2645 level, which is 143 points (or +5.6%) from tonight's closing price. The upside breakout in the Nasdaq should extend the rest of the market's rally as well. The S&P 500 ended the week at 1430 which is a new six-year closing high. The next potential upside target for the S&P is its 2000 high, which is 122 points (or 8.5%) from tonight's closing price. A week ago I expressed concern about the overbought nature of the market and the possibility for a short-term correction (if 50-day averages were broken). Fortunately, they held and the market appears to be resuming its uptrend. And for the first time in nearly two months, the Nasdaq is leading it higher. That increases the odds for the S&P to retest its old high.
Chart 11
Chart 12
