The economic news did not support a recovery yesterday. The Producers Price Index came in higher than expected confirming we have inflation in the production pipeline. Industrial production was down and capacity utilization came in at 76.1%. This does not bode well for employment as companies have no reason to hire until they are closer to full capacity.
Mortgage Applications came out weaker and Building Permits were down significantly month over month. The only positive news, and an anomaly considering the other real estate data, was that Housing Starts were up significantly. One plausible explanation is that people planning to build in the future have decided to build now before interest rates go higher and financing becomes too expensive. Also, building materials such as lumber etc. continue to rise due to inflation. Therefore, sooner may be significantly cheaper than later.
Despite mostly negative economic news, the markets showed strength yesterday after weakness in the late morning. Buying increased along with breadth. Breadth was 2 to 1 on the NYSE and 3 to 1 on the NASDAQ. Lowry Research supports this reporting Up Volume was 69% on the NYSE and slightly stronger on the NASDAQ coming in at 71%.
All technical indicators are still “overbought” and there is elevated risk for new buying at these levels. You may want to hold off on any new buying, but if you decide to buy you should stay with the strongest companies in the strongest sectors. The strongest sectors yesterday were energy, materials, and utilities. Also, with the recent pullback in oil and tensions beginning to rise again in the Middle East, you may want to explore energy companies or an ETF based upon the spot price of oil itself.
Additionally, gold and the dollar are gaining strength. I have attached two graphs, one short term and the other long term, of the SPDRs Gold Shares (GLD) which is an ETF based upon the spot price of gold. You can see it is just breaking through resistance and the trend line. As I write this newsletter, gold is up in overnight trading in Asia.
GLD L-T 2 16 2011
GLD 10 Mo M-T 2 16 2011
I have also attached two graphs, one short term and one long term, of the dollar index based against a basket of currencies. The dollar also seems poised to break through resistance.
Dollar Index Spot DXY S-T - 2 16 2011
Dollar Index Spot DXY L-T - 2 16 2011
Therefore, you may see gold and the US dollar rise simultaneously. This is unusual as gold is priced globally in US dollars so as the dollar gets stronger, gold usually goes down. If this happens, the media will be perplexed but you will know why.
