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SPX Has Gone Parabolic While the Russell 2000 Is Challenging All-Time Highs


Is this a top? Meanwhile, the dollar is falling through its 200-day moving average and looks destined to visit 75.00.


Meanwhile, the US Dollar Index (UUP) (UDN) continued its decline as it fell through its 200-day moving average and looks destined to visit 75.00. In past missives I have commented on my sense that we would see a weaker dollar for a multiplicity of reasons. Plainly, the dollar's weakness has helped our bullish recommendation on gold of a few weeks ago. In fact, I have written that gold has been telegraphing QE3 for weeks as it began to rally rather sharply. What is particularly interesting to me is for the first time in a long while gold bullion and gold stocks are rising together.

That doesn't always happen and it leads me to think the recent gold rally is for real. Moreover, many of the gold stocks are breaking out to the upside in the charts and they are doing so on expanding volume. We were early to gold's party back in 4Q01 when China joined the WTO and decided Chinese per capita incomes were going to rise with a concurrent rise in "stuff stocks" (energy, timber, cement, precious metals, etc.). While I doubt gold is going to stage a percentage move like it did back then, as we approach the strongest seasonal period for precious metals (October – January), we are thinking that if you don't have some exposure to the precious metals complex, now would be a good time to start. While there are a number of ways to get at said exposure, I have tended to use mutual funds. Last week while in New York City, I met with the good folks at Van Eck. And a month ago, I actually had dinner with the portfolio manager of Van Eck's International Gold Fund (INIVX), namely Joe Foster, who spoke about some his favorite gold stocks, like Goldcorp (GG) and Eldorado Gold (EGO).

The call for this week: To me, the only question is if the stock market is going to correct its current overbought condition by going sideways, or if it is going to correct back to the 1400 – 1422 support. In either event, I have been pretty confident that the Fed has already begun printing money. That has been eminently evident by the overall action in the commodity markets, the dollar, and the fact that stocks were unable to correct in the normal timing band for a daily cycle low. Indeed, I actually expected an easing of monetary policy out of last month's Fed meeting. At this point, we need to watch the pricing action of crude oil, for if it spikes higher it is going to be a decided drag on GDP. As Gary Savage points out:

Since QE is open ended, this time there's no telling how far the rally could go before traders get nervous enough to initiate a profit taking event. As I said above, we aren't going to begin a bear market until oil spikes, so any corrective move is only going to be a profit taking event that will quickly be recovered by more QE. At this point I wouldn't expect any real profit taking until the S&P tests the all-time highs. I really doubt any sane traders are going to look for a significant correction immediately following the confirmation of QE unlimited. At this point, any rational trader is getting long so they don't get left behind.

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Position in EGO, GG.
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