Stock Market, Gold, and the U.S. Dollar

By: Chris_Ciovacco

In a July 24, 2008 article, Commodity Breakdowns Warrant Defensive Action , I wrote the following based on the ugly look of the chart of financial stocks (XLF): "While financial stocks have hit a violent intermediate bottom and could rally for a while longer the odds favor lower lows in the months ahead as housing prices continue to decline. The chart below illustrates the structural nature of the problems facing the housing and financial industry.

There are fundamental reasons financial stocks have been hit so hard, reasons which go way beyond short selling. Additional bank failures in the coming months would not come as a surprise, which is supported by the rapid deterioration of the sector. Since our economy has become so dependent on the availability and use of credit, these problems will continue to impact U.S. and global growth."

Chart from July 24, 2008 CCM Commentary

I bring it up because the two charts below look so bad you have to conclude we still face serious fundamental problems in the months ahead. The chart below paints a disturbing picture for U.S. stocks (SPY, DIA).

Similarly, the chart of NYSE new highs minus new lows is very disconcerting. It illustrates we are way, way overdue for a bounce or rally in stocks. The chart shows a very extreme oversold condition. My concern is the fundamentals behind the chart below - the chart is no accident. We have fear based on fundamentals. Yesterday, the Dow was down 189 points. It would be nice to see these losses overcome with at least a 189 point rally.

We should all keep our eye on the U.S. dollar and future inflation. The inflationary pressures will be very strong on the other side of this credit crisis. For now, there is no need for immediate action.

Gold (GLD, GDX) offers a way to protect yourself from money creation and currency debasement. The fundamentals support gold. However, the technicals are not yet all that impressive.

By Chris Ciovacco
Ciovacco Capital Management

Copyright (C) 2008 Ciovacco Capital Management, LLC All Rights Reserved.

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

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