FALLING DOLLAR HELPING COMMODITY-RELATED MATERIAL STOCKS—FOREIGN STOCKS RISING FASTER THAN THE U.S.

Last week's message showed how a falling dollar was boosting the price of gold and its miners. The falling dollar may also be lending support to material stocks tied to various commodities which can also benefit from a weaker dollar.

FALLING DOLLAR BOOSTS MATERIAL STOCKS

The green area on the top of Chart 1 shows the U.S. Dollar Index peaking near the end of the third quarter and continuing to weaken. The solid line in the middle box shows the relative strength ratio of the  Materials Select Sector SPDR (XLB:$SPX) turning up during the fourth quarter and showing new market leadership as the dollar weakened. The third box in Chart 1 shows XLB touching the highest level in six months. While gold stocks have provided leadership, industrial metals and their stocks have also rallied.

The daily bars in Chart 2 show the Dow Jones US Nonferrous Metals Index ($DJUSNF) rising to the highest level in seven months. The index measures the trend of stocks tied to copper. The solid line in Chart 2 shows the price of copper rising as well. Stocks tied the aluminum and steel are also rising. The weaker dollar may also be providing support to energy shares.

Foreign stocks also appear to be benefiting from a weaker dollar and rising foreign currencies.

RISING FOREIGN CURRENCIES BOOST FOREIGN STOCKS

Foreign stocks are now rising faster than U.S. stocks which is a side effect of a falling dollar and rising foreign currencies. Chart 3 shows the iShares MSCI EAFE ETF or EFA (blue bars) and the euro (green bars) rising together since their October bottom. The euro is being shown because it's the largest foreign currency measured against the U.S. Dollar Index. All major foreign currencies are also rising. The EFA measures the trend of foreign developed stock markets. Emerging market stocks are also showing new leadership.

EM STOCKS AND CURRENCIES ARE ALSO RISING

Chart 4 shows the iShares MSCI Emerging Markets or EEM (red bars) in strong rally mode and trading at the highest level in seven months. The green line shows the WisdomTree Emerging Currency Strategy Fund (CEW) rising along with emerging market stocks. The main message there is that rising emerging currencies (tied to a falling dollar) are playing a major role in pushing emerging market stocks higher. Both foreign stock indexes have also exceeded their 200-day moving averages (MAs).

S&P 500 INDEX REACHES 200-DAY MOVING AVERAGE

While foreign stock indexes have exceeded their 200-day MAs, U.S. stocks have yet to do so. Chart 5 shows the S&P 500 index ($SPX) moving up this week to test that long-term resistance line (red arrow).  [The Nasdaq market is much further below its 200-day MA]. The $SPX also has to deal with overhead resistance formed during the fourth quarter which foreign developed and emerging markets have already exceeded. Thursday's CPI report showing consumer inflation declining for the sixth month in a row has encouraged some buying in U.S. bonds and stocks.   How the Fed reacts to cooling inflation pressure still, however, remains a major factor in market behavior.