Week In Review

The major indexes were slightly down last week, but the Transports had a more significant pullback down –2.65% for the week.  Commodities were the outperforming part of the market last week with oil up 4.61%, copper up 5.71%, and silver surging up 8.28%.  The powerful moves in commodities were aided by the declining dollar, which slid down –1.29% for the week.

Gold and gold stocks finally broke out of 5-month consolidations last week.  This is very bullish for gold and gold stocks.  The fact that the dollar is breaking down from a multi-year consolidation could add extra power to the near term potential for gold and gold stocks.  The dollar continues its breakdown from its lower trendline support out of its 2008 low and also continues to decline below a falling 30-week moving average.

Silver is continuing its powerful move despite stretching further and further away from its long term moving averages.  This is keeping many investors who would prefer buying pullbacks out of the silver market and on the sidelines while silver keeps marching higher.  Even though silver may be overbought, it will be hard for it to have a major pullback while gold is just starting to breakout again, and the dollar is breaking down from a long consolidation.  As long as those two drivers of the silver price are still in place look for silver to continue rallying.

Oil started accelerating its uptrend in March and hasn’t stopped since then.  This is eventually going to become a problem for the markets if oil continues to rally at this pace.  Watching the performance of oil sensitive sectors such as the Transports should provide telling clues as to the overall impact of higher oil prices on the market.  One thing to note about the current price of oil is that even though oil is still over 20% from its all-time high in 2008, gasoline is less than 10% from its all-time high.  This outperformance of gasoline versus oil has likely contributed to good performance by refining stocks over the past few months.

The falling dollar is being confirmed by a new breakout in the Euro above a multi-year downtrend line.  The Euro is also rallying above a rising 30-week moving average which is bullish for the Euro.

Bonds are also being affected by the falling dollar as they have been unable to rally back above their respective 30-week moving averages.  More significant technical damage will be done to bonds if both the 30-year and 15-year fall below 115 on the chart, which has been a multi-year support level.

Gold and Oil Should Outperform as the Dollar Continues to Fall

Some financial commentators have picked up on the fact that the dollar has failed to get a safe haven bid so far during the turmoil in the Middle East. This isn’t normal, especially considering the problems one of the main alternatives to the dollar, the Euro, has had over the past year or so. The dollar was the recipient of two separate flights to safety over the last 3 years, one during the financial crisis in 2008, and one during the Euro crisis in 2010. But since peaking in 2010 the dollar has steadily trended lower, even during the current crisis in the Middle East.

The chart below takes a long term look at the dollar, and shows the last major downleg from late 2005 to early 2008. Notice how the current chart pattern in the dollar is similar to the rounded top the dollar formed in 2006, before breaking down into Part 2 of the downleg. The dollar is also currently declining below a falling 30-week moving average, just like it was in 2006 before it broke the support line and started to accelerate its trend lower.

During Part 1 of the last major dollar downleg, from November 2005 to November 2006, the broad market including the S&P 500 and Nasdaq went higher along with commodities, gold, and oil. Clearly all asset classes, including stocks, were benefiting from the decline in the dollar.

The same thing has happened so far during the current dollar downleg from the June 2010 high.  The major indexes are up strongly along with commodities, gold, and oil.

During Part 2 of the last major dollar downleg, from November 2006 to March 2008,  the major indexes actually fell while the dollar lost 15% of its value.  This was in part due to the financial sector topping in early 2007, but is still a dismal performance when combined with the value lost in the dollar.  Commodities on the other hand, and more specifically gold and oil, performed exceptionally well and handily made up for the value lost in the dollar.

The outperformance by gold and oil over general commodities in Part 2 of the last major dollar downleg can also be seen in the next two ratio charts comparing gold and oil to the commodities index.  Notice that oil initially underperformed commodities during Part 1 of the downleg but came roaring back and outperformed dramatically in Part 2.

In the current dollar downleg so far, both gold and oil have underperformed general commodities and are also coming off of 2-year lows against commodities.

Given the undervaluation of gold and oil against commodities currently, they could easily switch gears and outperform commodities if the dollar breaks support and continues to trend lower.

Dollar Still Hovering at Critical 80 Level

The U.S. Dollar continues to consolidate right at the 80 level, which is roughly the midpoint of the trading range the dollar has established since bottoming in 2008. The trading range has narrowed with each successive rally and correction in the dollar, and appears to be forming into a symmetrical triangle pattern. The monthly MACD is at zero, which seems to be a good dividing line between bull and bear markets in the dollar.

Commodities and recently the bond market seem to be suggesting the dollar is more likely to breakdown into a renewed downtrend when this consolidation ends. Commodities as represented by the CCI Index are almost back to their former highs:

Copper is hitting new highs:

Oil is continuing to make new highs:

And the long bond has made a lower high that will have to be reclaimed in order for the uptrend in bonds to continue: