BOND YIELDS SURGE ON GROWTH AND INFLATION FEARS AS INVESTORS FLEE TREASURIES -- BOUNCING DOLLAR KEEPS GOLD AND OIL ON THE DEFENSIVE -- INDUSTRIAL METAL SHARES, HOWEVER, HAVE A STRONG DAY -- SEMICONDUCTORS LEAD NASDAQ MARKET TO NEW HIGH

RECORD YIELD CURVE ... Today's stock buying is coming at the expense of Treasury bonds. Chart 1 shows the T-Bond ETF (TLT) tumbling to the lowest level since August. Chart 2 shows the 10-Year T-Note Yield closing at the highest level since August. [The two charts are a mirror image of each other because bond prices and yields move in opposite directions]. Today's surge in bond yields simply confirms the upside breakout we pointed out early last week. Two factors that appear to be driving bond yields higher are a more optimistic outlook on the economy and growing fears of inflation. With short-term rates anchored close to zero, the yield spread (between short and long-term rates) is hitting a new record. Other fixed income categories are holding up much better than Treasuries. The charts, however, suggest that investors are moving out of the safety of Treasury bonds.

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FIRMER DOLLAR KEEPS COMMODITIES UNDER PRESSURE... Rising U.S. bond yields are helping push the dollar higher. Chart 3 shows the Dollar Bullish Fund (UUP) closing higher after a lower open. That late bounce was enough to keep commodities under pressure. Chart 4 shows GLD closing below its 50-day average for the first time since August. Chart 5 shows crude oil (USO) losing ground today as its tests its 200-day average. Stocks rallied despite the firmer dollar. Strangely, some commodity stocks actually led the advance -- including energy and industrial metals.

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METAL BREAKOUTS ... Basic materials were the day's top group. Most of the reason why can be seen in the next three charts -- Alcoa, Titanium Metals, and US Steel. All three broke out to new 52-week highs. Their relative strength ratios are rising as well. Industrial metals (mainly copper and aluminum) have held up better than other commodity groups over the last month and have been the top commodity performer during 2009. Industrial metals usually do better when investors turn more optimistic on the global economy.

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NASDAQ HITS NEW HIGH ... Stock indexes started Christmas week on a strong note. That's not unusual this time of year. Most stocks and stock groups closed higher (although volume was relatively light). The most impressive performance was in the Nasdaq Composite which hit a new recovery high as shown in Chart 11. That also pushed the Nasdaq above long-term resistance around 2200. Most of the gains came in the semiconductor group as Semiconductor Holders (SMH) hit a new 52-week high (Chart 12). The only thing missing from the day's strong price action was volume.

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AETNA LEADS HEALTHCARE HIGHER ... Health insurers continue to trend higher and are helping make healthcare one of the market's leading groups. Three of today's healthcare leaders were Aetna, Cigna, and Humana. Chart 13 shows Aetna testing its February high just below 35. Its relative strength line (below chart) has been trending higher since October (as has been the case with the entire group). On Friday December 11, I wrote a positive message on health insurers and showed Aetna along with UnitedHeath and Wellpoint both of which had achieved upside breakouts. Charts 14 and 15 show those upside breakouts continuing. Health insurers are probably also benefiting from healthcare legislation in the Senate which doesn"t include a public option.

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