S&P, Currencies & Gold

Sally Limantour
February 15, 2007

Yesterday we saw Retail Sales come in weak and Bernanke state that inflation risk is declining as the economy transcends from rapid growth to a more sustainable pace. This “cooling” was led primarily by the housing sector. Bonds rallied, the dollar tanked and stocks soared.

The S&P 500 reached its highest level in over 6 years and the Dow hit a new all-time high. Both markets took out the previous week’s low on Monday and reversed and have now created an outside bar on the weekly charts with a reversal higher – this is very bullish action. The Dow Industrials and cash S&P have now made higher weekly highs for 10 of the last 11 weeks and higher monthly highs for 7 consecutive months.

With the volatility levels remaining low the focus for most money managers has been to purchase puts to protect against a correction. Yesterday in our Virtual Trading Room we discussed this and Brad Sullivan was saying how the market could potentially have a “melt-up” which would cause all the folks on the sidelines to rush in. Should we, perhaps be buying calls in this low volatility environment? My short term model remains long, and stops are moved to 1445 basis the S&P 500 cash.

In Japan yesterday the GDP growth rate for 4th quarter was 4.8% which surpassed expectations of 3.7%. The yen rallied as did the Nikkei which was up .81% and closed the highest since May 8, 2000. The yen is continuing its rally this morning as are most currencies and the dollar is taking the heat. The perception seems to be with the dollar falling, gold will break out and make fresh highs as hedge funds and others raise their stake in gold as a commodity (rather than an inflation/dollar play). This coupled with the fact that the legacy banks are selling less gold is a hot story, but gold needs to break out above 684 to get the momentum going.

Also, a story out of China’s National Development and Reform Commission yesterday stated they had raised their exploration target for new gold reserves where they plan to produce 260 tons of gold which is a historical high for the country. This would basically mean an increase in supply and a drop in demand down the road. Both gold and silver are in a bull trend and until that changes, breaks are to be bought.