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The big surprise for me this week has been the turnabout in bonds - they
have blown right through AGet's daily w.4 projection and caused AGet to
reclassify this rally from corrective to impulsive suggesting that more
upside lies ahead. It should be noted that the weekly charts remain in
w.4 decline so the intermediate charts have yet to confirm a change in
trend. The Jun-Dec spread in Fed Funds dropped from indicating 3
increases at 1/4 each to 2. Finally, corporate bond funds have started
to improve across short, intermediate, and long maturaties. In fact,
bond funds have performed nicely for several weeks now. Still, I think
some caution is warranted as rates appear to be significantly
discounting inflation prospects in wages, benefit costs (especially
health care), energy, commodities, and services. We are continuing to
hold bond funds (mainly corporates) for yield without adding to
positions or shifting duration.
Looking at the equities, both NYSE and NASDAQ models remain on a buy.
Both the NYSE daily and weekly breadth models continue to look good.
NASDAQ daily breadth models look good, however the weekly has yet to
show much improvement - a sign that the bear is likely to have another
go at the NASDAQ to complete the decline with a w.5 and that new highs
are unlikely in the intermediate future. Normally, the strong NYSE
models would have us heavily long in S&P funds, however I continue to
believe that there is heightened risk in the equity markets from high
short term rates. We have done well with the REIT index fund and it
looks like it has more room to move up. Small caps, which were pounded
badly in the decline, have perked up and we have taken a light position
in the small cap growth fund - growth ratios are leading value and small
cap are leading big cap however I have a very tight trigger finger on
this one. With the dollar topping and yen bottoming, we have re-entered
the Asia pacific index fund which appears to have started a w.5 advance,
and will probably be adding to it more aggressively with any
confirmation that the dollar has topped. I continue to watch the
European index fund, but want to see signs of a firm bottom in the Euro
without appreciably higher interest rates before committing funds.
Finally, the precious metal fund is being watched carefully for signs of
opportunity - both gold and silver futures perked up noticeably when the
dollar weakened.
The currencies are at the top of our watch list. The monthly and weekly
charts show a completed w.5 high and the daily chart shows an incomplete
w.4 decline bouncing off strong support. The next couple of weeks are
going to be critical for the dollar - either it will reassert its strong
upward trend or it will begin to confirm that the long rally in the
dollar is over. A change in trend for the dollar has CRITICAL
implications for the flow of funds into US equity and bond markets,
equity prices, interest rates, commodity prices, and the cost of
imports. A clean move up through 112.50-113.50 would suggest the dollar
has more room on the upside. A decline below 105 would indicate
something serious may be afoot.
On the trading front, we are working the BP and JY charts closely,
looking for a pullback in US, and a strong rally in W.
Earl
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