A POINT & FIGURE VIEW OF CURRENT MARKETS SHOW UPTREND STILL INTACT -- GOLD STOCKS ARE RISING FASTER THAN BULLION -- DOLLAR AND VIX STILL IN DOWNTRENDS -- RISING TIPS MATCH JUMP IN COMMODITIES -- CORPORATE BONDS SELLOFF

STOCK TREND IS STILL UPWARD ... A rebound in global stock markets this week has kept the seven-month uptrend intact. On Monday, I showed major stock indexes bouncing off their 50-day moving averages. The only potential negative is that trading activity on the way up was less than it was on the way down the prior week. Rather than showing you the same bar charts today, I thought it a good time to look at some point & figure charts. As I've stated many times before, p&f charts provide more clarity and simplicity. Buy and sell signals are more precise and easily identified. P&F charts also allow us to spot any potential trend reversals. Chart 1 shows the S&P 500. You can see alternate X and O columns. [X columns represent rising prices, while O columns show falling prices]. A buy signal occurs when an X column exceeds a previous X column. Chart 1 shows an S&P 500 buy signal at 935 during July. [Red numbers mark the start of new months. "A" marks the start of October]. The S&P is nearing a test of its September high at 1080. Prices would have to fall all the way to 1010 to trigger a p&f sell signal.

Chart 1

SECTOR LEADERS ... The week's top performing sectors were energy, materials, and consumer discretionary stocks. P&f charts show their uptrends to be still intact as well. Chart 2 shows the Materials SPDR (XLB) also breaking its red down trendline (which is drawn at a 45 degree angle). Chart 3 shows the Energy SPDR (XLE) in a p&f uptrend but testing overhead resistance in the 56-58 zone. Chart 4 shows the Consumer Discretionary SPDR (XLY) having given a buy signal at 23 during April and still rising. The first caution sign in the three charts would be a three-box reversal into a O column.

Chart 2

Chart 3

Chart 4

GOLD AND SILVER UPTRENDS ... Charts 5 and 6 show p&f charts of gold and silver ETFs. Chart 5 shows GLD giving a series of buy signals starting in August and hitting a new record high this week. The GLD would have to fall all the way to 96 to give a sell signal. Chart 6 shows Silver iShares (SLV) giving a series of buy signals starting at 14.5 during May. Although silver has risen much faster than gold this year, it still remains below its 2008 peak. I explained in a recent message that silver is both a precious and an industrial metal. Its industrial component explains why it fell much harder than gold during the economic contraction of 2008. Silver's industrial component probably accounts for its better performance this year (55% versus 18% for gold). In my view, the important point is that both metals are rallying together and confirming each other's uptrend.

Chart 5

Chart 6

GOLD STOCKS ARE LEADING GOLD HIGHER... A couple of readers asked why gold stocks weren't leading gold higher since that's what usually happens in a bullion uptrend. I assume the reason for the question is the fact that bullion has broken out to a record high while gold stocks are still well below their 2008 peak as shown in Chart 7. On relative strength grounds, however, gold stocks are rising faster than gold. Chart 8 compares the Market Vectors Gold Miners Index (blue line) to the Gold ETF (flat black line) since 2000. [The blue line is in effect a ratio of the GDX divided by GLD]. From 2000 to the end of 2007, gold stocks actually rose faster than the commodity which is what normally happens in a gold uptrend. The stock market meltdown, however, caused gold stocks to underperform bullion by a wide margin during 2008. The blue line in Chart 8, however, has been rising throughout 2009 which means that gold stocks have risen more than bullion. In fact, the GDX has risen 42% during 2009 versus 18% for GLD. Looked at in that fashion, gold stocks are leading gold higher which they're supposed to be doing.

Chart 7

Chart 8

DOLLAR AND VIX STILL IN DOWNTRENDS ... This time last week the CBOE Volatility (VIX) Index had rallied up to its September intra-day high at 29.57. An upside breakout would have put the stock market uptrend in jeopardy. Chart 9 shows, however, that the VIX tumbled from that resistance barrier and is now closer to its September low. That removed any immediate threat to the stock market advance. One of the keys to this week's jump in stock and commodity prices was the drop in the Dollar Index to a new 14-month low. Despite a Friday bounce, Chart 10 shows the downtrend in the Dollar Index still intact. The UUP would have to rise above initial chart resistance starting at 23 (and its 50-day moving average) to turn its short-term trend higher.

Chart 9

Chart 10

TIPS OUTPERFORM TREASURIES... One of our readers asked why Treasury bond prices and TIPS were both rising last week. One signals inflation while the other signals its absence (T-bond prices fell sharply at week's end and bond yields jumped). The key to understanding their relationship has to do with "relative" performance. The black line in Chart 11 is a ratio of the 10-Year T-Bond ETF (IEF) divided by the TIP ETF (TIP). After falling throughout the second half of 2008, the rising TIP:IEF ratio shows rising inflation expectatons during 2009. Part of that has to do with the falling dollar since March (top of chart). The rising TIP:IEF ratio (black line) also shows some correlation to rising commodity prices during 2009. All three lines show rising inflation expectations.

Chart 11

CORPORATE BONDS SELLOFF... Last week I expressed some concern about a selloff in high-yield corporate bonds. Although they steadied this week, investment grade corporate bonds didn't. Chart 12 shows that ETF (LQD) ending the week at a new low for the month and threatening its 50-day average. Recent selling has also come on rising volume. Friday's selling in fixed income markets may have come from a statement from Mr. Bernanke that the Fed would raise interest rates when it was necessary to do so. Although he didn't really say anything new, bond traders took that a possible threat to rising bond prices. In any event, this week's downturn raises a caution flag on corporate bonds.

Chart 12