NASDAQ AND S&P 500 HIT NEW RECORDS -- SMALLER STOCKS AND TRANSPORTS HAVE A STRONG WEEK -- COMMUNICATIONS WERE WEEK'S TOP SECTOR -- BANKS LED FINANCIALS HIGHER -- KBW BANK INDEX MAY BE NEARING UPSIDE BREAKOUT -- EURO AND BRITISH POUND TOUCH TWO-YEAR LOWS

NASDAQ AND S&P 500 HIT NEW RECORDS... SMALLER STOCKS AND TRANSPORTS STRENGTHEN... Stocks ended the week on a strong note.  Charts 1 and 2 show the Nasdaq Composite Index and the S&P 500 closing at record highs on Friday.   A report showing 2.1% GDP growth for the second quarter didn't seem to worry stock traders too much.  Strong consumer spending offset a dip in business investment.  A drop in exports also hurt second quarter performance.  That, however, probably had more to do with weaker foreign markets than the U.S. economy.    While U.S. stocks gained, foreign markets lost ground.  Interest rates in the states also rebounded this week, while foreign yields dropped.   That explains the rebound in the dollar.  Commodities lost ground as the dollar strengthened.   Transportation stocks had a strong week, thanks largely to a 16% jump in United Parcel Service (UPS).   Rate sensitive utilities weakened as bond yields rose.   Smaller stocks finally attracted some attention.

Chart 3 shows the S&P 400 Mid Cap Index challenging its late-April high.  A close above that chart barrier would put that index at the highest level this year.  Chart 4 shows the Russell 2000 Small Cap Index also having a strong week.   New buying in domestically-oriented smaller stocks would help broaden out the market rally, and would be an encouraging sign for the U.S. economy.  This week's rebound in the dollar may be helping smaller stocks (because smaller stocks depend less on exports).  An upside breakout in financial stocks may be helping as well.   Financials are the biggest sector in the Russell 2000.

Chart 5 shows the Dow Transports ending the week on a strong note.

COMMUNICATIONS, FINANCIALS, AND TECHNOLOGY ARE WEEKLY LEADERS... Chart 6 ranks sector performance for the past week.  A big jump in Snap, Twitter, and Alphabet (Google) led gains in the communications sector.    A new record high in the semiconductor group led technology higher.  UPS led the industrial group.  While toy stocks (Hasbro and Mattel) led consumer discretionary higher.   Bond proxies like utilities and REITs weakened along with bond prices.   Banks led financials.

Chart 7 shows banks leading financials (XLF) which were the week's second strongest sector (while hitting a new 16-month high).   That's a good sign for that sector because banks are its biggest component (42%).  And their chart pattern is looking a lot stronger.

BANK INDEX NEARS UPSIDE BREAKOUT...Several recent messages have shown the upturn in bank stocks.  Along with a number of individual banks that have achieved bullish breakouts.   We may be about to see one for the entire group.  The weekly bars in Chart 8 show the KBW Bank Index ($BKX) testing its late April intra-day peak (103.21).  The BKX is also challenging a falling trendline extending back  to early 2018.  That would make an upside breakout even more impressive.   The histogram bars show bank stocks being relatively weak performers this year.  The  green circle, however, shows stronger relative performance over the last month.

DOLLAR GAINS GROUND...Here's a chart the Fed probably doesn't want to see.   And certainly not anyone in the West Wing of the White House.   The weekly bars in Chart 9 shows the U.S. Dollar Index rising this week and drawing dangerously close to a new high for the year.   Moving average lines show the USD still in an uptrend.  It's not hard to understand why.  The U.S. has the strongest economy on the planet.  And the highest interest rates in the developed world.   Plus the fact that foreign central bankers around the world have either lowered interest rates this month (including Australia, South Korea, and South Africa); or have announced their intention to do so shortly (the ECB).   That has weakened their respective currencies.   Especially the euro.

The blue bars in Chart 9 show the euro touching the lowest level in two years.   That's not too surprising either considering that so many eurozone bond yields are already below zero; with plans to move them even deeper into negative territory in September.   Eurozone bond yields dropped again this week while Treasury yields bounced (weakening the euro against the dollar).   The direction of the euro is especially important because it accounts for 56% of the Dollar Index.    The British Pound is doing even worse.

The weekly bars in Chart 10 show the British Pound ending the weekatthe lowest level in more than two years.   A drop in British bond yields weakened sterling against the dollar.   So have heightened expectations for a "hard Brexit" from the European Union at the end of October, which raises economic risks for both.  All of which greatly complicates the job of the Fed.

STRONGER DOLLAR MAKES FED'S JOB HARDER... The Fed is expected to lower its rate by a quarter point next week.   Some expect more after that.   Others believe more cuts aren't necessary in a relatively strong U.S. economy.   Falling foreign currencies, however, are pushing the dollar higher than the Fed (or the White House) probably want to see.   There was even talk in the White House this week about intervening to lower the dollar.  With foreign central bankers already committed to lower rates, however, the Fed may have little choice but to follow them lower to keep the dollar in check.  How much it follows is the big question.