FALLING DOLLAR BOOSTS COMMODITIES AND COMMODITY EXPORTING COUNTRIES -- BOUNCE IN CHINA HELPS GLOBAL MARKETS -- BIOTECHS PUSH HEALTHCARE INTO WEEK'S TOP SPOT

EURO HITS TWO-YEAR HIGH AGAINST DOLLAR... The U.S. Dollar Index fell during the week and is drawing dangerously close to last December's low (green circle). The foreign currency with the biggest influence on the USD is the Euro. Expectation for continuing economic strength in Europe -- and the likelihood for further ECB rate hikes -- pushed the Euro (blue line) to a new two-year high against the dollar. The weekly bars in Chart 2 show the Euro (blue line) moving up to challenge its late 2004 peak near 136. A close above that chart barrier would increase the odds for the USD to threaten its corresponding low near 80. That would be a very important test for the U.S. currency.

Chart 1

Chart 2

DOLLAR NEARS TEST OF MAJOR SUPPORT... The monthly bars show the twenty-year trend for the Dollar Index. That trend appears to be down. After peaking in 1985 (courtesy of the Plaza Accord), the dollar found support three times along the 80 level (1990, 1992, and 1995). A seven-year rebound from 1995 to 2002 retraced fifty percent of the previous downtrend. An aggressive Fed easing campaign at the start of 2001 pushed the U.S. currency all the way down to the 80 level in 2004 where it's been stabilizing since then. The USD appears headed for a possible retest of that 80 level. Needless to say, a break below that level would be a very bearish development for the greenback. Two beneficiaries of that would be foreign currencies and commodities.

Chart 3

CRB INDEX NEARS RECORD HIGH ... There are two versions of the CRB Index. The one I'm showing here is the CRB Continuous Commodity (CCI) Index which gives less weight to energy prices and more to agricultural markets. It may give a truer picture of the underlying trend in commodity markets. The point of the chart is to show that the long-term uptrend in commodities is still intact. In fact, the CCI is nearing a test of its record high hit earlier in the year. Its relative strength line (vs. the S&P 500) turned up in Febuary. That confirms the fact that commodities were the strongest asset class during the first quarter. That also explains why basic materials, precious metals, and energy have been among the market's strongest groups. That trend is likely to continue as long as the dollar continues to weaken.

Chart 4

COMMODITY EXPORTERS AND IMPORTERS ARE RALLYING... There's another side-effect of a falling dollar and rising commodities. A falling dollar benefits foreign stock markets, many of which hit record highs this week. Rising commodities give an added boost to commodity exporters. That includes developed markets like Australia and Canada, as well as emerging markets like Russia and Latin America. Chart 5 shows Latin America iShares (ILF) hitting a new high this week. The world's biggest commodity importer is China. That means that a healthy Chinese market is good for commodities. The February meltdown in Chinese stocks caused profit-taking in global stocks and commodities. Chart 6 shows, however, that the FTSE/Xinhua China iShares (FXI) has broken a three-month down trendline and is trading back over its moving average lines. That's giving a boost to global stock markets. Chart 7 shows EAFE iShares (EFA) hitting a new record high. Although the US market has become a global laggard, it's being helped by rising foreign shares.

Chart 5

Chart 6

Chart 7

HEALTHCARE STARTS TO SHOW NEW LEADERSHIP... Over the past month, I've been writing about new signs of leadership in traditionally defensive market sectors like consumer staples, telecom, and utilities. Another defensive group that's starting to attract new money is healthcare. Outside of utilities, basic materials, and energy (which are the top 2007 leaders), the two best sectors have been consumer staples and healthcare. Healthcare took the top spot this past week. The weekly bars in Chart 8 show the Health Care SPDR (XLV) in an uptrend for the last four years. The falling blue line, however, which is a relative strength ratio of the XLV divided by the S&P 500, fell during most of that time span. That means that healtchare has been an underachiever during the current bull market (which is what defensive stocks generally do). The green box in Chart 8, however, shows a levelling off in the XLV:SPX ratio over the last year. That could be an early sign of a bottom. The blue circle in the green box shows the ratio upturn since December. Chart 9 gives a closer view. The two blue arrows in Chart 9 show the ratio turning up in December and again during April. The ratio may be about to break a two-month down trendline. That means that healthcare is starting to show new signs of market leadership. Biotechs and drugs are part of the reason.

Chart 8

Chart 9

BIOTECH SURGE... Biotechs were the week's top industry group. Chart 10 shows the AMEX Biotechnology Index (BTK) challenging its recent highs. [The BTK is also challenging its 2000 high near 800]. The upturn its its relative strength ratio (bottom of chart) shows the group's new popularity over the last month. Chart 11 shows the Biotech iShares (IBB) also having a strong week. Although the IBB is still below its 2007 high, it cleared its 50-day moving average in decisive fashion on Thursday on rising volume. Last Friday I showed Medimmune hitting a new 2007 high (Chart 12). Thursday's biotech star was Celgene.

Chart 10

Chart 11

Chart 12

CELGENE BREAKS RESISTANCE ... Celgene gained 4.5% on Thursday to lead the biotech group higher. The daily chart shows the stock breaking a four-month down trendline (on rising volume). Its relative strength ratio (top of chart) did the same. A close over 60.12 would put the biotech leader at a new record high. There were other healthcare leaders outside of biotech.

Chart 13

ESRX, FOREST LABS, AND WYETH HAVE STRONG WEEK... The next three stocks also showed up on the healthcare leader board for the week. Chart 14 shows Express Scripts closing over 85 for the first time in nearly a year. Its RS line has been rising since January. Chart 15 shows Forest Labs closing over its 50-day average (on rising volume) after recently bouncing off its 200-day line. I recently showed upside breakouts in a couple of drug stocks like Abbott Labs and Merck. Wyeth broke out to a new six-month high (Chart 16) on good volume. Its RS line (top of chart) broke a six-month down trendline. Add healthcare to the list of defensive underachievers that are starting to overachieve.

Chart 14

Chart 15

Chart 16

HAPPY EASTER AND PASSOVER...