Dollar at a 3 Month High on Friday

Top Line: Friday's markets jumped out of the gates with the Dow quickly up about 175 points. Then we had a pullback followed by another rally such that the stock market ended pretty much on the highs of the day. This move has relieved some of the oversold condition in stocks. The rally has taken us back up to the 200 day SMA (Simple Moving Average) in the NDX and the QQQQ's. This line should provide good resistance for trading in the next few days and lead to further selling. By the way, Asia markets are up tonight in response to the Friday US markets.

The big news on Friday: CPI was up 0.6% for May (about 7% annual rate) but that is a seasonally adjusted rate with the real rate at 0.8%. Of course, not to worry, the "core" rate was only up 0.2%. Also, the sentiment figure dropped on the U Michigan's sentiment index from 59.8 to 56.7. Yes, oil was down a tad but still is near all time highs. Do you think the news is bullish? No, we don't either but the news is not the market...

One of the things to keep in mind for trading this week is the options expiration which should provide some near term volatility--when we say volatility, we mean up and down action. For the most part complacency rules but we think this is about to change with the stock market heading South again soon.

Friday's trading also gave us a new relative high in the US Dollar index which has been on our radar screen for a while. This is the highest it's been since late February. We have mentioned the Dollar in several places recently because we think it will be going up, continuing to go up is what we mean.

Dollar strength leads to some of our other thoughts for the markets. Gold versus the dollar is and should be a constant battle. Inflation erodes Dollars and gold as we buy it is measured in dollars so it tends to go in opposite directions to the Dollar. That means with the Dollar going up that Gold should continue to go Down.

In fact Dollar strength is at the center of our thinking on Oil, too; yes, gas, too. With a stronger Dollar and with Oil purchased in Dollars, it stands to reason that Oil will go down in price, too. Some would say that the price of oil is about to go "to the Moon" but that only strengthens our argument, with our contrarian position.

Dollar strength could be good for US Treasury bonds, too. They do seem to have come off their highs over the past several months (since the Bear Stearns situation in March) and seem ready for a reversal higher. This means the price goes up on the bonds, and the rate goes down.

This subject, interest rates, gives us a chance to talk about the silly talk out of the Fed the past few days. They have recently been talking Tough on inflation, like they are just about ready to raise rates...right. Did anyone tell these guys there is an election this year? Or, that the economy was in a little trouble? The only thing they seem to watch is the rate on the Treasury bills which has come up along with long rates but at a faster pace.

What this rate rise on the T-Bills does to the Fed is persuade them to Think about raising rates. Back in March, these short rates went below a half a percent and now they are back up pushing 2%. Where is the fed funds rate? 2%

The Fed, in their simple model, now are seeing T-Bill rates move back up and think they have succeeded in their task to relieve the credit crunch. Maybe we give them too much credit here but seriously, what they look at is how Banks are affected by the credit problems. They Never give a second thought to inflation or how the Dollar might be affected.

To tie this up in a nice little bow, we have suggested that the Dollar has bottomed and should continue to rise (we watch the Dollar index which is a basket of currencies). This action is a surprise to the markets and they don't really understand what is happening. The short end of the Treasury market is the one that we need to keep our eyes on for the Fed's actions. Since we have little reason to think the Fed will be raising rates anytime soon, we must think the T-Bills rates will fall. We are not convinced of this but it does seem the right answer given all of the above fairly logical reasoning. Of course, your comments are always welcome.

FSI: 92.84 (GOOG had a big day but this index is still down 12.7% on the year)