CAN'T BLAME RISING GRAIN PRICES ON TRADERS -- ENERGY ETFS STILL IN UPTRENDS -- REGIONAL BANKS LEAD FINANCIALS LOWER -- HOMEBUILDERS AND RETAILERS WEIGH ON CONSUMER DISCRETIONARY SECTOR -- 13 AND 34 DAY EMAS ARE NEGATIVE

RAIN KEEPS GRAIN PRICES RISING... With all of the focus on energy and precious metals, let's not forget the strong price action in agriculatural markets. chart 1 shows the DB Agriculatural ETF climbing again today after recently exceeding its April high. The DBA is second only to energy this year. The fact that food prices are rising is no secret. Corn prices are trading at an all-time high and soybeans are strong. It's been interesting listening to all of the recent blame for rising commodity prices falling on market traders. It will be interesting seeing how they're going to blame traders for all the recent flooding the midwest.

Chart 1

ENERGY STOCKS KEEP CLIMBING ... One of the ways to determine the direction of commodities is to look at stocks tied to those commodities. As of today, energy stocks are still rising. One way to tell when the stocks are turning down is to watch underlying support levels. Chart 3 shows the Energy SPDR (XLE) recently bouncing off its 50-day moving average. That puts initial chart support at 83.39 which is its early June low. Chart 4 shows initial chart support for the Oil Service Holders (OIH) at the June intra-day low at 204.47. The OIH is also trading over its 50-day moving average. It's unlikely that energy prices will fall much as long as energy stock keep rising.

Chart 2

Chart 3

FINANCIALS LOSE ANOTHER 2% ... While inflation-sensitive stocks had a good day, financials didn't. In fact, they were the day's weakest group. Chart 4 shows the Financials SPDR (XLF) falling more than 2% and threatening its March low. Chart 5 shows the Bank Regional Holders already trading below that support level. It's been said many times before, but it's worth repeating. The market's not doing to rise much as long as the financials remain weak.

Chart 4

Chart 5

HOMEBUILDERS LEAD DISCRETIONARY SECTOR LOW ... More bad news on the housing front (and higher energy prices) weighed on consumer discretionary stocks. Chart 6 shows the Consumer Disretionary SPDR backing off from its 50-day moving average today. Chart 7 shows a similar negative trend for the S&P Retail Index. The biggest losses, however, came from homebuilders which are trading new six month lows (Chart 8). That's not good for the stock market either.

Chart 6

Chart 7

Chart 8

13 AND 34 EMAS TURN DOWN... There was talk of stagflation in the media today. A big jump in the headline PPI report kept fears of inflation growing. [I heard one economist say today that he now believed that the jump in crude oil was a long-term trend and not just short-term volatility. And, as a result, we had to start paying attention to headline inflation numbers]. We've been saying that for much longer. Stagflation refers to the unwelcome combination of rising inflation and a weak economy. Today's reports on weak manufacturing and housing and higher PPI is a good example of stagflation in the making. Here's the problem for the Fed. If it raises rates to battle inflation, it risks hurting an economy that's already in trouble. That's especially true of housing. If it allows inflation to run unchecked, it risks bigger problems later. Neither scenario is good for the market. Chart 9 overlays the 13- and 34-day EMAs on the S&P 500. The two EMAs turned negative last week and are still negative. The spread between the two EMAs (bottom of chart) has fallen below its zero line. The weekly EMAs in Chart 10 have been negative since last December. The spread between the two lines (below chart) is starting to weaken again.

Chart 9

Chart 10