FINANCIALS LEAD OVERSOLD MARKET HIGHER -- OTHER POSITIVES INCLUDE A PULLBACK IN THE DOLLAR, BONDS, AND GOLD AND BOUNCE IN COPPER AND OIL -- CHINA SHOWS RELATIVE STRENGTH

AIG IS TODAY'S FINANCIAL LEADER... Most of today's headline is a repeat of the one I posted at midday last Tuesday just as the current market bounce was starting. I'm posting it again today to show that all of those positive forces are still at work. The only difference is that AIG is today's strongest financial stock. Chart 1 shows the beleagured insurance giant surging 80% today on the heaviest volume in months. [The use of a log scale in Chart 1 puts the big percentage gain in better visual perspective]. Without trying to read too much into one day's jump, this is consistent with strong percentage rebounds in other financial stocks over the last week, and is helping to fuel more positive sentiment across all financial markets. Those positive signs include selling in Treasury bonds, a weaker dollar, continued profit-taking in gold, and stronger copper and oil prices.

Chart 1

BOND INVESTORS SHOW MORE CONFIDENCE... The slide in Treasury bonds that started in January continues. Chart 2 shows the 20+Year Treasury Bond Fund (TLT) falling to the lowest level in three months. Other bond categories, however, are holding up much better which include High Grade Corporate Bonds (Chart 3) and Treasury Inflation Protection Securities (Chart 4). Short-term rates are starting to bounce a bit as well. All of which suggests that fixed income investors are a little less fearful than they were a few months ago.

Chart 2

Chart 3

Chart 4

DOLLAR CONTINUES TO WEAKEN ... The U.S. Dollar continues to weaken from resistance at its November high. Chart 5 shows the PowerShares Dollar Bullish Fund (UUP) moving closer to its 50-day average. Its 14-day RSI line, however, is trading below 50 for the first time in two months which is a sign of weakness (blue circle). So is the downturn in the daily MACD lines (red arrow). As I've suggested before, weakness in the dollar should translate into profit-taking in gold and more buying of stocks and economically-sensitive commodities like copper and oil. So far, that seems to be what's happening. Gold is losing ground today while most other commodities are gaining. Especially copper.

Chart 5

COPPER REACHES FOUR-MONTH HIGH ... Chart 6 shows copper trading at the highest level since last November and trading above a rising 50-day moving average. A lot of traders view strength in copper as a sign of more optimism in the global economy. That optimism is also reflected in the rising price of Freeport McMoran Copper & Gold (Chart 7). That's not enough to signal a major bottom. It is enough, however, to lure some sideline money back into global stocks. Part of the buying is copper is tied to signs of relative strength in China which is the biggest importer of the metal. Chart 8 shows the iShares FTSE/Xinhua China 25 (FXI) clearing its 50-day moving average (and two-month down trendline). The relative strength ratio (below Chart 8) shows China acting much better than the Dow Jones World Stock Index. Relative strength in China is a positive sign for global stocks and commodities.

Chart 6

Chart 7

Chart 8