WEEK'S BIG WINNERS WERE GOLD AND TIPS AS INVESTORS BUY INFLATION HEDGES -- OIL SERVICE AND SEMICONDUCTOR INDEXES BACK OFF FROM 2009 HIGHS -- S&P 500 PULLS BACK FROM 800 LEAVING ROOM FOR ONE MORE DIP

GOLD STOCKS TOP 200-DAY AVERAGE... The Fed's midweek surprise announcement that it was buying Treasury bonds had a fairly predictable ripple effect through the various financial markets. Naturally, Treasury bond prices jumped and yields collapsed. The big drop in bond yields pushed the dollar sharply lower and commodities higher. As Arthur Hill described during the week, gold experienced an impressive upside reversal and may have reverted back to an inverse relationship to the dollar. One of the top stock groups on the week was precious metals. A month ago, I turned cautious on the short-term outlook for precious metals when the Market Vectors Gold Miners ETF (GDX) fell back below its 200-day moving average. Chart 1, however, shows the GDX closing well above that resistance line and on the verge of a new six-month high. That puts precious metal assets back in the fast lane. The main reason for the jump in gold and other commodities is the belief that a weaker dollar resulting from the Fed's printing of so much money will increase inflation pressures. One way to hedge against that possibility is to own some precious metal assets. Another way is to own some TIPS.

Chart 1

TIPS ARE WEEK'S TOP BOND PERFORMERS ... Although Treasury bond prices had a strong week, they weren't the strongest bond category. That distinction belongs to Treasury Inflation Protected Securities or TIPS. That makes perfect sense considering that the Fed's actions are potentially inflationary. Investors bought TIPS for the same reason that they bought gold. Chart 2 shows the iShares TIPS Bond ETF (TIP) surging to the highest level in six months and clearing its 200-day moving average for the first time since last September. I don't think the Fed is too worried about that right now. In fact, a little inflation psychology is the best way to break the back of the current deflationary psychology. In a deflation, consumers put off buying things in the belief that goods will get cheaper. When inflation fears creep in, consumers feel more urgency to buy things before they get more expensive. Hence, the idea of "reflating" our way out of the current predicament. FDR did that in the midst of the Great Depression and it worked. Mr. Bernanke is trying it now. The main catalyst in that process is a weakening of the U.S. Dollar. Hence my recent observation that stocks needed a weaker dollar to help turn things around.

Chart 2

TWO SECTOR LEADERS MEET RESISITANCE ... Arthur Hill pointed out during the week that financial stocks had reached a short-term overbought condition and pulled back from overhead resistance barriers. He showed Internet stocks doing the same. Here are two more. On Tuesday, I showed oil service and semiconductor stocks starting to show signs of leadership and moving up to challenge their 2009 high. Charts 3 and 4 show both groups backing off from the highs reached during January and February. If the market is putting in an intermediate term bottom (as I suspect it is), both groups should continue to outperform the rest of the market. Over the short-run, however, their late week pullback contributed to Friday profit-taking. That's not necessarily a bad thing and may be a necessary part of any bottoming process.

Chart 3

Chart 4

S&P 500 BACKS OFF FROM 800 BARRIER... A week ago Friday I wrote that the S&P 500 appeared to need one more downleg to complete a five-wave decline from its early January peak. I also stated that the key to whether or not that happened was the 800 level. That's because a downleg needs five waves to be complete. Chart 6 shows that the early March bottom appeared to be a wave 3. In Elliott Wave work, a wave 4 bounce should not exceed the bottom of wave 1. Chart 5 shows the bottom of wave 1 to be just above 800 (804). I also pointed out on Tuesday that the 800 barrier was a 50% retracement of the January/March decline and represented a test of the 50-day average and a two-month down trendline. That's exactly where the S&P peaked on Thursday. That raises the likelihood of another downleg which could retest the early March low. It may or may not take out that low. In my view, however, that would complete not only this five-wave sequence, but the larger five-wave sequence going back to at least last May. In other words, another pullback would help set the stage for a much larger intermediate rebound. One way we'll know that's happening is when the 800 level is eventually exceeded. To me, it's just a matter of whether that happens sooner or later.

Chart 5