October 1 Market Update

We'll dispense with most of the analysis aside from the dollar and stock markets per our discussion last night.

Summary
We do not yet believe that the global equity rallies are over.  Worst case, we believe we *may* be seeing divergences where some stocks will begin to trade more on their fundamentals.  It will take time for that trend to be established.

We still see this period as a correction--one that may have more downside, but probably not much.  It will soon be time to move into gold stocks to exploit a skyrocketing gold price and favorable equity environment, though we must continue to watch the environment and not jump in too soon.

Let's get to the equity review...


US Dollar
The dollar bares close watching at this time.  Based on the RSI and slow stochastic, the dollar should be turning at this stage.  However, there is still "room" left for the dollar to strengthen more as it approaches the 50 day moving average.  If the dollar continues to strengthen and the RSI moves above 50, that may be the first indication of an impending trend change of weakening dollar and rising asset prices.  Keep your eyes on the dollar.  As of this writing, the dollar is at 77.11 in evening trading.  This is in alignment with our expectations for a rebounding day on Friday, as you will see below.

Equities
Today's large down move in equities was led by financial and energy sector stocks.  A breakdown in the financial sector WILL send the general stock market down at a fast rate.  There is strong support for the banking stocks just below the 50 day moving average as shown on the BKX.  There is still room for a decline, which would likely only happen at this stage during a dollar rising period.  To work off the overbought condition, the ideal situation would be to bounce off of its support line and trade sideways for a while, until the dollar resumes its downtrend.

  The energy sector has been working within a channel.  A bounce off of these levels would be ideal, but like the financial sector, the possibility of more downside exists.  Note that natural gas has started its correction, as we stated it may last night.

The S&P broke down from the bearish rising wedge we discussed last week, but the drop stopped at a key support level.  A drop below 1000 will likely challenge the 950 level.  More downside is possible, but this may it for now.

Of greater concern is the risk of a new rally that sets up a head and shoulders topping pattern.  If the S&P breaks down below 1025 and rebounds from 1000, that becomes a possibility.
 

On the positive side, as we forecast, Dr. Copper bounced from its lower channel and rose today, even as everything else was correcting.  This could be interpreted as a sign that this is no more than a correction.

Gold stocks reacted negatively, as did the yellow metal.  Again, as we stated last night, any move below 1000 is a buy for gold.  The gold stocks are going to be a buy as soon as the S&P shows it is done correcting, which will be when the dollar shows its top.  We're close.  We may already be there for the gold stocks.  We are beginning to look into key gold equities, which will be a focus for our next posting.

We'll be showing some relative comparisons of gold stocks to the HUI index tomorrow, along with a thesis on inflation versus the floating exchange value of the dollar index.