MONEY MOVES OUT OF GOLD BACK TO STOCKS -- FINANCIALS, RETAILERS, AND HOMEBUILDERS LEAD RALLY -- A TEST OF FEBRUARY HIGHS NOW APPEARS LIKELY -- BOND/STOCK RATIO TURNS DOWN

GOLD CORRECTION MAY HAVE MORE TO GO ... A number of readers have asked for a potential downside target for gold. Chart 1 shows the streetTracks Gold Trust (GLD) falling well below its 50-day moving average. In addition, its recent fall has taken place on heavy volume. That shows some pretty signficant profit-taking. The horizontal Fibonacci retracement lines measures the uptrend from last August. GLD has retraced 38% of that prior uptrend which is a minimum downside target. A more likely target would be a full 50% retracement, which would bring prices back to the November high. There are several reasons why gold is falling. One is that the dollar is rising. A more significant reason probably has to do with recent gains in the stock market starting in mid-March. Money poured into gold and other commodities starting last August when the market ran into trouble and the Fed started lowering interest rates. That weakened the dollar and gave a big boost to bond and gold prices. It now appears that the pendulum has swung back to stocks. That's positive for the dollar, but negative for bonds and gold. That was certainly reflected in today's intermarket action.

Chart 1

FINANCIALS AND CONSUMER DISCRETIONARY LEAD RALLY... Two market sectors that pulled the market lower since last fall pulled it higher today. The two biggest percentage gainers were Financials Sector SPDR (Chart 2) which rose 7%, and the Consumer Disretionary SPDR (Chart 3) which gained 4.5%. Both ETFs closed back over their 50-day lines. And they did so on rising volume. Their relative strength ratios (below charts) show tentative signs of new upside leadership having started in mid-March. Banks and brokers rose 7% and 8% repectively today to account the big gains in the XLF. Homebuilders and retailers accounted for the strong gains in the XLY.

Chart 2

Chart 3

RETAILERS AND HOMEBUILDERS HAVE BIG DAYS ... Chart 4 shows Retail Holders climbing 4.5% today. That puts the RTH within striking distance of its January high and its 200-day moving average. Its relative strength line started showing improvement in January. Chart 5 shows the S&P Homebuilders SPDR climbing 8% in heavy trading. The XHB closed over its 200-day moving average for the first time in ten months. Its relative strength ratio has been rising since January as well. They had been among the worst market performers since last summer.

Chart 4

Chart 5

TEST OF FEBRUARY HIGH NOW APPEARS LIKELY ... Today's strong combination of sharply rising prices, and higher volume, leaves little doubt about the market's immediate direction. The path of least resistance is now up. The question is how far and for how long. At the very least, that calls for a challenge of the February highs. A close over those highs is needed to signal that an intermediate bear rally has begun.

Chart 6

Chart 7

Chart 8

PENDULUM SWINGS BACK TO STOCKS ... Bond prices fell as stocks rose today. Chart 9 shows the 7-10 Year Treasury Bond Fund (IEF) losing more than one percent today on rising volume. Although it hasn't broken its 50-day line yet, I suspect that it will. That's because of Chart 10 which plots the IEF/SPY ratio. That bond/stock ratio broke its 50-day line today, which suggests that the rotational pendulum is swinging away from bonds and back to stocks. At least for the time being.

Chart 9

Chart 10