FED COMES THROUGH WITH QE3 -- TREASURY BOND PRICES DROP WITH THE DOLLAR -- STOCKS AND COMMODITIES SOAR -- PRECIOUS METALS LEAD COMMODITY CHARGE -- TREASURY PRICES DROP AS HIGH YIELD BONDS AND TIPS RALLY -- STOCK INDEXES BREAKOUT TO UPSIDE ON RISING VOLUME
DOLLAR PLUNGE GIVES BIG BOOST TO COMMODITIES... The Fed announced that it will purchase $40 billion a month in mortgage backed securities which adds to its holdings of long-term securities and ushers in another round of quantitative easing (QE3). The markets have all reacted in predictable fashion. The dollar and bond prices are falling while commodities and stocks are rising. Chart 1 shows the PowerShares Dollar Index Bullish Fund (UUP) threatening to fall below its spring lows. As is normally the case, the falling dollar is giving a strong boost to commodities. Chart 2 shows the DB Commodities Tracking Index Fund (DBC) climbing to the highest level in six months. It has also broken a down trendline extending back to May 2011. Not surprisingly, precious metals are leading the commodity charge. Economically-sensitive industrial metals are also rallying.
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Chart 1
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Chart 2
METALS SURGE ... Precious metals are extremely sensitive to negative dollar trends. And they're leading the commodity surge today. Chart 3 shows the PS Precious Metals Fund (DBP) surging more than 2% to a new-six month high. Industrial metals are rallying as well. Chart 4 shows the PS Base Metals Fund (DBB) having climbed over its 200-day average. Rising copper prices indicate more optimism in the global economy and is also good for global stocks. Basic material stocks are among today's strongest stock gainers on the back of rising commodities.
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Chart 3
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Chart 4
TREASURIES FALL WHILE HIGH YIELD AND TIPS JUMP... Even within the fixed income sector, various bond categories are acting as expected. Long-term treasury prices are falling as bond yields jump. Chart 5 shows the 20+Year T-bond fund (TLT) falling dangerously close to its August low and its 200-day average. Corporate bonds, which are more closely tied to fortunes of corporations, are holding up much better. In fact, they're rising. Chart 6 shows High Yield IShares (HYG) rallying to a new high. That's because high yield bonds are more closely tied to stocks than to bonds. Treasury Inflation Protected Securities (TIPS) are also rallying today for the same reason that commodities are. And that is the prospect for higher inflation down the road. Chart 7 shows the TIPS Bond Fund (TIP) bouncing off its 50-day line today.
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Chart 5
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Chart 6
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Chart 7
STOCK INDEXES BREAK OUT ON RISING VOLUME... The next three charts show the three major stock ETFs trading well above their spring highs to reach the highest level in years. And they're rising in heavier trading. That's a healthy combination.
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Chart 8
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Chart 9
