Dec 7, 2004

Morning Story

Overnight the dollar weakness has reasserted itself with some vigor. The sharp rally yesterday (displayed nicely in the middle of this page) afternoon looked like the real deal but once again we wake up to find new lows. Treasuries were also weak overnight. The bond rally and dollar bounce were a gift to bond managers as they try to shift out of USD duration and into EURO and UK longs.

Equities continue trying to behave as though we are in the Spring of '03 but these shifts going on in the bond market seem very different. Except for China the world is growing more slowly than anyone would like and Europe, Japan and the U.S. are trying to boost activity with stimulative rates. Currently it looks as though the U.S. is going to be forced out of that game as markets take U.S. rates up. The upside is that the bond shifts are forcing the U.S. currency lower which will have a longer term stimulative effect. Maybe over the long run it is a zero sum game for the economy but in the short run the real currency losses in the markets will create sellers and weakness.

Lastly I wanted to point out the McClellan oscillator (chart) is behaving very oddly here, dripping off the right side of the chart while the indices float higher. This indicator tracks the market breadth and is reflecting a narrowing rally. In the few years I have been watching this indicator markets have always responded very quickly such deterioation but this time feels different. I was away from the market during 99 (which rallied for months with failing breadth) and will need to do some research but I point it out as a notable developement of the last couple days.

**added at 11:00 AM
The breadth is negative again despite this AM's strength. The relationship that has existed between the breadth and market really appears to be diverging here. It feels a lot like the trend is shifting and the breadth will no longer be the indicator it has been.

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