By Jim Donnelly, Olson Global Markets

After a few weeks of “fits and starts”, it appears that the CRB index and its underlying commodity components are in position to extend higher again. An end-of-the-quarter weakening of the dollar index may well be the culprit here. Despite a rather well received “mini” Treasury refunding last week, the greenback slid lower in the wake of rekindled references to the need for a new reserve currency by foreign holders of U.S. debt.

From a technical perspective, a bullish reverse Head & Shoulders pattern that targets a move up to the 292 area on the CRB index has been formed. A much needed break above key “neckline” resistance at 245 and a subsequent “retest” of that level has already occurred as well, putting daily technical studies into a new bullish configuration.

The recent rise in commodity prices, of course, has helped to firm up a number of commodity-related stock valuations. Last week’s reversal in initial jobless claims, however, suggests that the rise in the CRB index may have less to do with an increase in final demand than with a decline in the dollar. A week-long slide in interest rates on U.S. Treasuries also tended to diminish demand for the dollar.

Still, commodity prices have experienced a “disconnect” with the balance of actual “supply and demand” issues in the past …as witnessed by the rally in 2008 which reached its crescendo last July. The current set-up for commodities is far from having anything resembling a fever pitch to it. Instead, it resembles a market that has been base building and getting ready for a renewed advance. It might be the anticipation of future demand that will tilt the balance toward commodity bullishness.

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By Jim Donnelly, Olson Global Markets

One of the theories widely embraced by many fundamental analysts is that for the overall equity markets to improve in earnest, the financial sector must lead the way up. After all, it was the financial sector that dragged a huge portion of the equity markets down. Further, it is the area of the financial system that has caused credit to be allocated so judiciously of late and as a result represents the stability, or lack thereof, of the economy as a whole. Thus, it is the sector of the market that must lead the way and lift the overall market back to health.

Gloomier assessments of the economy point to the potential for future shocks to possibly derail the financial sector over the intermediate-term. Commercial real estate issues, another round of residential foreclosures, credit card defaults and chronic unemployment levels are all sited as potential potholes. That said, the equity markets tend to be a discounting mechanism and as such have likely priced in a lot of these deep dark scenarios.

From a technical perspective, the Financial Select Sector SPDR Fund, whose ticker symbol is XLF, appears to be basing out in the form of a bullish reverse Head & Shoulders pattern on daily bar charts. Although some technical studies suggest more downside price action is likely over the short-run, intermediate-term prospects look to be very bright by comparison.

At Friday’s close, the XLF stood at $12.04. The key to the bullish reverse Head & Shoulders pattern scenario playing out, however, would be for a solid break above “neckline” resistance (which is now at the $13.10 level) to occur. If that “breakout” happens, a more invigorating move up to the $21 area would likely follow. That, of course, could also trigger a more broad based recovery in equities and catch bears and those with idle cash off guard.

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by Jim Donnelly, Olson Global Markets

One of the most ubiquitous “buy recommendations” lately has been to stock up on gold or gold equivalents. You hear it from numerous portfolio managers on the business channels. You hear it from infomercials, both on T.V. and on the radio. Heck, you even hear it at backyard barbecues and at the barber shop. The theory is that as the United States Treasury issues huge amounts of debt, along with ramped up debt issuance from a number of other European countries, an alternative place to park global funds is needed in order to preserve the “purchasing power” of cash. Thus, most commodity prices have been on the rise again including the likes of gold and silver even though short-term worries have been centered on price stability and the aversion to deflation.

When I called my broker last week and told him that I was considering buying gold after the dollar started to falter following a strong rebound from last summer’s weakness, he said to me, “Join in, everybody is into gold.” He went on to say, “I don’t know of anyone who is short gold!”

By itself, that assessment gave me reason to pause. But when another investment banker friend of mine said that one of his brothers-in-law (who happens to own three Harley Davidson motor cycles and has had seven new tattoos etched onto his back) was also into gold “big time”, I really began to wonder if a healthy percentage of the masses was already an owner of gold and various precious metals.

Nevertheless, concerns over the value of the dollar are now being expressed by the Chinese, the Russians, and from time to time, a number of OPEC nations. Hedge fund managers and currency traders are quick to point out the recent steepening of the yield curve is proof that there is an aversion to buying long dated treasuries. A number of well known bond fund managers are virtually saying the same thing.

While all of this might be true with the future value of the greenback in doubt, the current chart of GLD (SPDR Gold Shares), the largest Gold ETF, suggests that a correction lower maybe in store first. On long-term monthly charts, stochastic studies are still rising but are now considered to be in an overbought condition. In addition, a bearish MACD divergence on long-term charts suggests that buying momentum has been stalling. More over, it appears that GLD is quickly approaching a test of key trend line support (in green) at the $89.50 level.

If that level fails to hold as support, a larger correction to the downside may be in store instead. The “risk” is that a possible move down to key trend line support (in blue), which currently sits in the $70 area, might well occur over the intermediate-term and surprise a lot of gold bulls.

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by Jim Donnelly, Olson Global Markets

Well, the market is now trying to digest the latest set of economic numbers and is trying to update its expectations. May’s employment report appeared to be better than had been hoped for, and the bond market responded by producing a steeper yield curve and higher nominal bond yields. Higher bond yields, in turn, strengthened the dollar and knocked gold and other commodity prices down a peg or two from their recent highs.

Higher Treasury bond yields, however, started some pundits to question whether the recent home buying and refinancing binges would continue at their recent pace. In addition, were stocks beginning to look attractive relative to stocks considering their current P/E ratios? In other words, is the S&P 500 index fairly priced at current levels?

During the past week’s rally, the S&P 500 hit a peak of 951.69, up 284.90 points from its March 666.79 low or a 42.7% gain before settling at 940.09, up 41% from its low. That’s a heck of a move!

Technically, the S&P 500 remains in an overbought condition and is ripe for a correction. Nevertheless, market momentum may still carry the Index a bit further with a test of key trend line resistance, now at the 973 level, not out of the question before the 2-1/2 month surge gives way to sellers in earnest. The reason for an additional extension might be due to fresh expectations that the recession may have already ended. An unexpected recovery in the dollar index could also add to current bullishness. Another thought is that “long only” funds may feel forced to commit cash to the equity markets before the end of the 2nd quarter so that their investors feel exposed, no matter how late, to the turn around higher in stock prices.

From a technical perspective, a test of the 973 area, if it occurs, would present a grand opportunity to take profits and return to cash. Moreover, higher equity prices could result in lower volatility levels which, in turn, would make “put” options look very attractive.

In any event, a test of this key resistance area could occur fairly soon. Get ready for some profit taking!

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