STOCK INDEXES CLOSE WELL ABOVE 50-DAY LINES CONFIRMING START OF SUMMER RALLY -- RAILS AND DISCRETIONARY STOCKS HIT NEW 2011 HIGHS -- BOND PRICES DROP AS YIELDS CLIMB -- JUNK BONDS, HOWEVER, FOLLOW STOCKS HIGHER

FALLING DOLLAR BOOSTS COMMODITIES... It was a good week for commodities and an even better week for stocks. But it all started with the dollar. We explained earlier in the week that the Dollar Index (UUP) appeared to be in a bearish consolidation pattern within a major downtrend. That view favored a lower greenback and higher foreign currencies (along with higher commodities). Chart 1 shows the UUP ending the week on the downside. Dollar selling came just in time for commodities. Chart 2 shows the DB Commodities Tracking Fund (DBC) bouncing off its 200-day moving average from an oversold condition. The commodity gains would have looked even better except for heavy selling of grains on Thursday on a report of a near record corn crop. The best commodity performers were base metals like copper. Chart 3 shows copper hitting a new two-month high. Base metals are probably the most economically-sensitive commodities. As a result, their rally this week shows more optimism on the global economy and stocks.

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Chart 1

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Chart 2

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Chart 3

S&P 500 CLEARS MOVING AVERAGE LINES... How good a week it was for stocks is demonstrated in Chart 4. After bouncing off its 200-day moving average (red line) twice over the previous two weeks, the S&P 500 surged through its 50-day moving average (blue line) on Thursday and added impressively to that bullish breakout on Friday. The only thing missing was volume which remained on the light side. My Thursday message gave in initial upside target for the SPX at its late May peak at 1345. It almost reached that on Friday. Chart 5 offers a potentially higher target. That chart applies a longer-range version of Bollinger bands with a 100-day time horizon. [That's the equivalent of a 20-week period]. After bouncing off the lower band, the SPX cleared the 100-day average (dotted line). That raises the possibility of a recovery to the upper band near the May high. That higher target is reinforced by the seasonal tendency for stocks to rally at midyear into July (the traditional summer rally). July is normally the strongest month in the third quarter. [Thanks largely to a weaker dollar, foreign stocks did even better than the U.S. More on that later].

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Chart 4

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Chart 5

RAILS AND DISCRETIONARY STOCKS HIT NEW HIGHS... Transportation stocks had an especially good week. Chart 6 shows the Dow Transports closing just shy of a new 52-week high thanks largely to the rails. Chart 7 shows the Dow Jones U.S. Railroad Index closing at a new high. That's a good sign for the economy since transportation stocks are very economically-sensitive. Of the three transportation groups, rails are the least impacted by rising energy prices. Consumer discretionary stocks also had a standout week. Chart 8 shows the Consumer Discretionary SPDR (XLY) hitting a new high. That's also a good sign for the market.

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Chart 6

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Chart 7

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Chart 8

TREASURIES DROP AS JUNK JUMPS... When stock and commodity prices rise, bond prices usually fall. And, not surprisingly, bonds were the big losers on the week. That lower trend was especially evident in longer-dated Treasuries as shown in Chart 9. The 20+Year T-Bond iShares (TLT) fell to a two month low and is threatening its 200-day line. Most other fixed-income markets fell as well. But not all. As is usually the case, high-yield (or junk) bonds track the stock market more closely than the bond market. Chart 10 shows the High Yield Corporate Bond ETF (HYG) climbing above its 50-day line this week after bouncing off its 200-day two weeks ago. Notice how closely the HYG tracks the S&P 500 (upper line in Chart 10).

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Chart 9

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Chart 10

RISING EMERGING CURRENCIES HELP STOCKS... A falling dollar (and rising foreign currencies) usually gives a bigger boost to foreign stocks. That was evident this week as foreign shares saw even bigger gains than the US. Chart 11 shows Emerging Markets iShares (EEM) climbing from a three-month low a couple of weeks ago to a two-month high this week. As further evidence that a lot of those gains are coming from a weaker dollar, take a look at Chart 12. That chart shows the Wisdom Tree Dreyfus Emerging Currency ETF (CEW) which is a basket of twelve emerging currencies from Latin America (Mexico, Brazil, Chile); Europe, Middle East, and Africa (South Africa, Poland, Israel, Turkey); Asia (China, South Korea, Taiwan, India, and Malaysia). That basket of emerging currencies also hit a two-month high this week and shows a close correlation to emerging market stocks in Chart 11. Chart 12 demonstrates that rising foreign currencies (and a weaker dollar) are principal reasons for this week's reinstatement of the global "risk-on" trade.

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Chart 11

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Chart 12

HAPPY FOURTH OF JULY ...