Suddenly, All Are On Board

 | Sep 27, 2011 | 7:05 AM EDT
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I know this is anecdotal, but two days ago the market could not find a friend in the world. Now everyone is on board with the rally. What's more, with the beloved momentum stocks taking a backseat Monday, market players have started to bottom-fish in economically sensitive names.

I still feel these groups were overdone to the down side and should bounce. Regarding copper in particular, I realize I discussed the metal Monday, but I want to show you the reversal here. In this case, even a rally to $3.50 per pound would be a 50% retracement from the recent slide -- although if the market likes some new development out of Europe, I can see a stab back at $3.70.

Copper -- Daily

But, for all commodity bears, there is now a new fly in the ointment: the dollar. I have not discussed the buck in a week or so but, as you might recall, last time we checked in I thought we could see a rally into that 79 area on the dollar index. It has been hovering in this area for three trading days now. I suppose it is possible we'll simply see the index go sideways now and digest the recent move. But if the rumors are true, and something really big happens in the eurozone, then that uptrend line at 77.50 would comes into play. A break of that trend line changes the "I hate commodities" game that has taken over the markets in September.

Dollar Index -- Daily

We may as well check in on gold, since it has lost about 20% so far this month. In the chart below, you can see the support off of which it bounced. There are those who will say all is great now, and that it's time to buy gold. I will say that, to my eyes, this looks like a crash. It's similar to how the S&P 500 looked in mid-August, and what we saw after that was an awful lot of sideways action. I would expect gold to have an oversold rally now, perhaps as far as the level of $1,700 to $1,725 per ounce. However, I do not believe will go right back to $1,900 without a lot more work (i.e., basing).

Gold -- Daily

As for the stock market, I realize -- as noted above -- that folks are quite excited about the rally. But did you notice breadth wasn't too great? In fact, the S&P tacked on 20 points just about two weeks ago, and the advance-decline line was behaving better then than it did on Monday's 26-point rise. The S&P rallied more than 2%, and upside volume did not even reach 90% of the total. Furthermore, total volume was relatively light.

I should also mention the put-call ratio of the Market Volatility Index (VIX), as it soared to just above 300%. We have not seen a reading this high since late 2009, so this is really unique. Since August of 2008 there have been five other readings above that level.

Four of those readings found the S&P dropping 2% to 4% within a few trading days. Only once did the market not care and just keep on rallying; that was in November 2009 -- which, as you might recall, was during a quantitative-easing period.

Now, let's get to the good news! The Dow Jones Transportation Index more than recaptured its broken uptrend line. Much to my dismay it failed at the 4250-to-4275 level for only about an hour. The Nasdaq finally underperformed, which I deem a positive. Also, the banks outperformed yet again.

I still believe we could easily see plenty more ups and downs in the weeks ahead.


OBO -- Nasdaq

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