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Market Wrap

Ouija board spells U N C E R T A I N T Y

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Just when market participants thought the ouija board had decoded a pausing Fed after Friday's "inflation friendly" nonfarm payroll figures, hawkish comments regarding inflation from Fed Chairman Bernanke once spelled UNCERTAINTY that the Fed wouldn't continue its stance of measured rate hikes.

July Fed Fund futures (ff06n) ticked 94.89 early in today's session, predicting a less-than 50% chance of a 25-basis point hike at the June meeting, but by the close settled at 94.82 an 72% probability that the Federal Open Market Committee will raise a quarter-point later this month to 5.25%.

Sabre-rattling comments by Ayatollah Ali Khamenei, Iran's Supreme Leader had equities stumbling out of the gate, with July Crude Oil futures (cl06n) jumping as high as $73.40 intra-day. The Ayatollah threatened that Iran might disrupt crude supplies to the West should the country be invaded over its nuclear program.

Despite the Ayatollah's threats, July Crude settled up 27 cents, or +0.37% at $72.60.

Middle East uncertainty did find what I would consider to be defensive buying in Treasuries, with the benchmark 10-year Yield once again undercutting the 5.00% level in early morning trade.

Market internals had been confirming some of the recent week's price action. New high/new low (NH/NL) indications are vastly improved from the 05/22/06 Market Wrap, but NASDAQ's 5-day NH/NL ratio softening up again at the mid-point of 50% suggests some short-term lack of bullish leadership.

U.S. Market Watch - 06/05/06 Close

A snapshot of today's PRICE action would depict a "slow bleed" lower for equities, where a notable break to the downside was found after Fed Chairman Bernanke said current core inflation measures were at the "upper end" of his and many Fed officials comfort zone.

While equities accelerated losses to the downside, sharp reversals were found in the Dollar Index (dx00y) with the dollar reversing losses, while sellers stepped in on Treasuries, with the benchmark 10-year YIELD ($TNX.X) finishing up 3.2 basis point to 5.026%. The StreetTracks Gold Trust (GLD) $62.29 -0.33% also reversed course on Dr. Bernanke's focus toward inflation.

The dollar's fluctuation continues to create a great deal of uncertainty among broader equity traders, as well as gold itself.


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I've been trading some gold equities long and short in the OptionInvenstor.com Market Monitor (BGO, NEM, GG), and boy have they been VOLATILE. I think traders will agree that a softer/weaker dollar trade tends to depict market psychology of a "Fed pause," and easing thoughts towards inflation. But as the Dollar Index (dx00y) challenges recent lows of 83.75, market participant certainly show jitters that a major breakdown in the greenback could open the floodgate for broader selling in equities.

August Gold futures (gc06q) currently trade down $7.90 at $640.80 after kissing the $650.00 mark prior to Monday's open outcry settlement at 01:30 PM EDT.

S&P 500 Index (SPX.X) - Daily Intervals

I touched briefly on the NASDAQ NH/NL ratio readings earlier tonight. While I don't post the SPX (500 stocks) NH/NL readings in my Market Internals, I do keep track of them in order to gather an observation of bullish/bearish leadership in this widely followed index.

The above chart of the SPX is updated from my last Market Wrap on 05/22/06 and our last visit. The SPX had just undercut the 1,254.78 level that day and traded its recent relative low on 05/24/06. Of the 500 stocks in the S&P 500, 3 had been able to achieve a new 52-week high, while 19 had traded a new 52-week low, with a DAILY NH/NL ratio of 13.64%.

Tonight's final tally would show 6 stocks achieved a new 52-week high, while 14 stocks a new 52-week low with a DAILY ratio of 30.00%. These comparison readings should have a bear looking to lock in some type of gain if they hadn't under more "oversold" NH/NL readings.

I've updated recent "Max Pain" Theory tabulations. The rather notable decline for August (from 1,300 in 5/24/06 Market Wrap) strongly suggests a flat to lower trade being expected during the summer months.

I want to quickly tie some of the overseas markets into the dollar's weakness. "Developing markets" as well as major foreign market's like Japan's have exhibited notable weakness in recent weeks.

Japan's Nikkei-225 ($NIKK) - 50-point box scale

The above chart of the Nikkei-225 is one worth being alert to near-term. If you think the Dow Industrials ($INDU) have had a tough time recently, the Nikkei as well as other Asian Pacific markets have been under some heavy selling pressure.

The Dow Industrials ($INDU) exhibits a similar supply/demand pattern as found in the Nikkei, where further weakness in the Nikkei-225 could have bearish implications.

Dow Industrials ($INDU) - 50-point box scale

Inflation fears, or dollar fears aren't just a "U.S. concern." One could argue that much of the weakness found in U.S. equity markets started overseas.

As the Dow Industrials were breaking to multi-year highs in May (red 5), the Nikkei-225 ($NIKK) was triggering a triple-bottom sell signal at 16,750.

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