RISING BOND YIELDS GIVE DOLLAR A BOOST -- MOST COMMODITIES ARE ALREADY IN DOWNSIDE CORRECTIONS -- OIL MAY BE NEXT -- SEMICONDUCTORS RESUME 2008 UPTURN -- DOW AND NASDAQ 100 NEAR TEST OF 200-DAY AVERAGE

DOLLAR STARTS TO BOUNCE ... On Tuesday, I showed that the pullback in gold started in mid-March just as bond yields (and the stock market) were starting to bounce. There are three reasons why gold is pulling back at this point. One is that money has been flowing back into stocks. Another is that rising U.S. rates aren't good for gold. A third reason is that rising U.S. rates are positive for the U.S. Dollar which, in turn, is bad for gold. The final piece of that intermarket puzzle may finally be falling into place with today's strong rebound in the greenback. Chart 1 shows the close relationship between the 10-Year T-Note Yield (daily bars) and the U.S. Dollar Index (green line) over the last six months. That's because the Fed has been lowering rates while the rest of the world hasn't. With European rates holding steady, the main dollar driver has been the direction of U.S. rates. Chart 1 shows bond yields climbing to a two-month high today after bouncing off their January low. Rising rates are finally starting to pull the Dollar Index (green line) higher. Gold traders apparently saw that coming.

Chart 1

GOLD LEADS EURO LOWER ... As so often happens in intermarket work, one market gives an early warning that the other one is getting ready to turn. Since gold and the Euro trend in the opposite direction of the U.S. dollar, both markets trend in the same direction of each other. Over the last year, gold and the Euro have risen together as the dollar fell. Chart 2 shows, however, that gold prices peaked in mid-March (as bond yields and the stock market) started to bounce. Since then, however, the dollar kept dropping and the Euro rising. Apparently, that discrepancy in the currency markets is now being corrected. Chart 3 shows the Euro tumbling against the dollar today (along with most other foreign currencies). Gold isn't the only commodity to anticipate a dollar rebound. Most other commodities also peaked in March.

Chart 2

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MOST COMMODITY GROUPS PEAKED IN MARCH ... While all of the media attention has been focused on daily record highs in the energy pits, most other commodity groups have not been keeping pace. Chart 4 shows the PowerShares Energy ETF (DBE) hitting a new high this week. It's the only commodity group to do that. Chart 5 shows the DB Commodities Tracking Index (DBC) starting to back off from its mid-March peak. The next three charts show why. The PS Industrial Metals ETF (DBB) is well off its March high (Chart 9), as is the PS Agricultural ETF (DBA) in Chart 10. Chart 11 shows the Precious Metals ETF (DBP) doing the same. Outside of the energy patch, the only other commodity to reach a new high recently has been corn. The narrowness of the commodity advance suggests to me that the recent advance is on thin ice. With most commodities in retreat, it's hard to imagine the energy markets escaping some profit-taking. That will be especially true if the dollar continues to bounce.

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SOX RESUMES 2008 UPTURN... On Tuesday, I was worried that the market might be losing some short-term support from the semiconductor group. That's no longer the case. Over the last two days, the Semiconductor (SOX) Index has reached a four-month high and continues to show some upside leadership. Chart 10 shows, however, why it's too soon to get too excited about chip stocks. Semiconductors have been one of the market's weakest groups over the last four years. The modest rebound since January is still well within the confines of a major downtrend. The weekly bars in Chart 10 show major trendline and moving average resistance lurking above the market. A major test will come near the 200-day day (40-week) moving average. Until it gets there, however, chip stocks are helping to extend the stock market rally.

Chart 9

Chart 10

NASDAQ 100 NEARS 200-DAY LINE... The big tech stocks are driving the Nasdaq 100 toward a test of it 200-day moving average. Today's 1.7% advance puts the Power Shares QQQ Trust within points of that important resistance barrier just above 48. There's also chart resistance along the November low around 49. That makes the 48-49 region an important test for the QQQQ. Its rising relative strength ratio (bottom of chart) shows Nasdaq leadership since late February. That's good for the market for as long as that leadership lasts. Chart 12 shows the Dow Industrials also nearing a test of its 200-day line. The market is getting a nice boost from today's 4% advance in financial shares.

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Chart 12