GLOBAL STOCKS AND COMMODITIES SURGE ON FALLING DOLLAR -- LONG BOND AND DOLLAR ARE MAIN CASUALTIES OF QE2 -- FED ACTION IS FORCING INVESTORS TO SEEK HIGHER YIELDS WITH MORE RISK
ANOTHER POSITIVE DOW THEORY SIGNAL ... With the US elections behind us, and the Fed giving the markets what they wanted yesterday, global markets are reacting very swiftly and in a positive manner. The US Dollar Index has fallen to the lowest level in two years and giving a big boost to commodity markets. The CRB Index is trading at a two-year high. Gold and oil prices are up sharply as well as stocks tied to those two commodities. Another result of the weaker dollar is that foreign stocks are leading the global stock rally. One side-effect of a falling dollar is that it pushes money overseas in the search for better yield in foreign stocks and currencies. The weaker dollar also forces investors into higher-yielding (and riskier) assets like emerging markets and junk bonds. The main casualty is the 30-year bond which took the Fed news badly since it's concentrating bond buying in the five to six year category. That widened the yield curve which should help bank stocks. That may explain why financial shares are nearing upside breakouts (more on that later). Homebuilders are also showing some upside progress which record low bond yields (and mortgage rates). On Tuesday, I wrote that my main short-term concern was the fact that most US stock indexes were approaching tests of their April highs. The good news is the Dow Industrials and Transports are trading over those highs in early trading (Charts 1 and 2). If they can hold those gains through the rest of the day, the Dow Theory buy signal given a couple of months ago will be re-confirmed. Keep in mind that stocks also now have the four-year cycle working in their favor. MORE CHARTS LATER.
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Chart 1
