The dollar plunged more than a full percent on Tuesday while gold soared +27 to a record high at $1,272.

Market Statistics

The dollar fell to a 15-year low versus the yen after a key election in Japan made intervention to weaken its currency less likely. Japanese Prime Minister Naoto Kan won a crucial party election over a challenger who analysts thought would be open to selling yen to weaken the currency. The dollar also hit a one month low compared to the Euro and fell below parity to the Swiss franc, which is widely used as a safe-haven currency. Switzerland's central bank is expected to raise the country's interest rate by a quarter point on Thursday. China's yuan hit a new high for the third consecutive day against the dollar as U.S. lawmakers prepare for hearings on China's foreign exchange policies on Wednesday and Thursday.

The market is also speculating that the Federal Reserve is about to announce a new mortgage backed security purchase program to combat the rise in interest rates over the last two weeks. Many analysts expect the Fed to embark on another quantitative easing program and announce it with the FOMC statement on September 21st for purchases starting in November. The delay would be to get past the election before making any new moves. Jan Hatzius, an analyst with Goldman Sachs, believes the Fed will purchase another $1 trillion in U.S. securities. Another trillion will flood the financial sector with cash and guarantee future inflation.

Dollar Index Chart

Traders got another shot of positive sentiment from today's economic reports. The Retail Sales report for August rose by +0.4% and better than expected. If you exclude auto sales that number rises to +0.6%. These gains were unexpected after several retailers and PC makers had warned that sales were slow in their respective sectors. The gains came despite a -1.1% decline in electronics and appliances and -0.5% in furniture and home furnishings. Sales were up +3.6% year over year and +4.8% excluding autos. Core retail sales, excluding building materials and autos, rose +0.7% and the fastest rate since February.

Overall sales slowed slightly year over year but grew for the second consecutive month. Analysts claim consumers have paid down debt and are positioned to increase purchases if the economy appears to be strengthening. This suggests the potential for a double dip is decreasing. The weekly chain store sales snapshot showed sales spiked +0.8% last week.

Business Inventories spiked +1.0% compared to estimates for a +0.5% gain and a +0.3% rise in the prior month. This is a lagging report covering the July period but the news is still good. Retail inventories rose by +0.7% and are up +2.3% year over year. This is the strongest gain since February 2008. Unfortunately most of the gains were in autos. Conditions in the supply chain are stable and growing. That is about the best news we could get given all the talk about a double dip recession. One negative point was a buildup of inventories at building supply stores. The post tax credit decline left them holding excess levels of inventory that they have yet to work through.

Key economic reports due out the rest of the week include Industrial Production, Philly Fed Survey and Consumer Sentiment.

Economic Calendar

Cisco made news today when John Chambers announced the company will begin paying a dividend in 2011. The tech company is sitting on a pile of cash totaling $40 billion and has never paid a dividend before. The yield will not be exciting at somewhere between 1% and 2% but it is better than nothing for a stock that recently traded under $20 after hitting $28 back in April. Cisco shares were up strongly on the news but faded as the day progressed to end with a small gain. Microsoft surged to a six week high on rumors they may also begin paying dividends.

Cisco Chart

Hewlett Packard (HPQ) rallied +2.6% on rumors they may be close to finding a new CEO and on the positive buzz generated from the ArcSight acquisition. There was also a rumor HPQ and IBM are battling each other over the potential acquisition of Radware (RDWR). HPQ is on an acquisition spree with the company stealing 3Par (PARS) from Dell over the last couple weeks. Traders appear to like the rumors they are hearing and those shorting the company after the departure of Mark Hurd were squeezed like Charmin on the spike today.

Hewlett Packard Chart

Best Buy (BBY) reported stronger than expected earnings and helped to provide a positive boost to investor sentiment early in the day. BBY reported earnings of 62-cents, a +62.2% increase. Revenue was down to $11.3 billion a decline of -2.9%. That did not seem to impact traders since BBY beat the estimates of 44-cents per share. BBY shares rose +6% on the news.

Best Buy is in the right place at the right time with no material competitors since Circuit City folded. Best Buy is now selling iPads and Kindles, cell phones and video games like Microsoft's Halo as well as normal electronics equipment. Prices for flat screen TVs are dropping like a rock because of the competition among suppliers and this is positive for Best Buy. Positioning themselves to sell the hottest items on the planet in the Kindle, iPad, Android phones and video games like Halo and Call of Duty is a guaranteed moneymaker plus they will generate additional sales from the store traffic those items will bring. I was negative on BBY last quarter when they announced marginal earnings. With the consumer spending slump bottoming out I have reversed to bullish on Best Buy's prospects.

Best Buy Chart

Goldman Sachs held a retail investor conference today and apparently the retailers attending said they were pretty happy about back-to-school retail season. Pennys CEO Mike Ellman said the back-to-school season exceeded company-wide projections. Macy's CEO, Terry Lundgren, echoed those sentiments saying the season had been "great" after several years of weak activity during this period. He singled out Madonna's Material Girl line, which he said is receiving more attention than Macy's Thanksgiving Day parade. Shares in JCP rose +1.68, KSS +1.65 and ANF +1.34.

This is another positive sentiment point for the economy. With a broad cross section of retailers all saying positive things about a period that was expected to be ugly it appears we could be setting up for a strong fourth quarter.

Steel companies were weak after Nucor (NUE) warned of a slowdown in the industry, especially in the construction sector. Nucor said it expects profits to drop in the third quarter. Nucor said steel orders started to weaken in June and had a marginal impact on Q2 sales but would weigh heavily on Q3 results. Nucor is the biggest maker of steel beams and their largest market is nonresidential construction. That part of the construction sector is not coming back for quite a while. CIBC cut their target price for Nucor to $40 from $45 and NUE closed today at $39.41. Shares in US Steel (X) were down -1.48 and Cliffs Natural Resources lost -4.37.

Shares of NUE were halted after they erroneously traded for 1-cent earlier today and triggering the circuit breakers. According to the exchange a very large order hit the CBSX and they filled what they could before sending the balance of the order out to sweep the other exchanges. Those other exchanges filled what they could automatically and then returned the balance of the unfilled order to the CBSX. With the CBSX order book already depleted the last remaining shares were filled at the only bid remaining, which was a penny. This triggered the halt and the exchanges busted the low trades. The trades all occurred within a couple of seconds. NUE traded three times the volume they traded on Monday.

Bank stocks were mixed today after the big gains on Monday. Traders were taking profits on the banks after the Basel III rally on Monday. A day after the news the smoke has cleared to some extent and traders were wading through the regulations to determine which banks would be hurt the worst and which would benefit. Banks had risen for the last two weeks in anticipation of the news. Profit taking was inevitable.

Transocean Offshore (RIG) reported it was moving a second rig out of the Gulf. The Discoverer Americas is headed to Egypt where it will rent for $486,000 per day to Statoil. Earlier this month Transocean said its Marianas rig was leaving the gulf to head for West Africa under contract to Italy's Eni. That leaves Transocean with 11 deepwater rigs in the gulf. Diamond Offshore announced in July they were transferring a rig to Egypt and canceling a contract with Devon. Transocean also said they were taking two shallow water rigs out of service due to lack of demand. One of the rigs had been under contract for $90,000 and the other $150,000 per day. That raises the total number of jackup rigs out of service to 29 out of 65 jackups owned by Transocean.

Earlier this morning the Interior Department said it was unlikely to extend its six-month moratorium on drilling in the gulf. Michael Bromwich, head of the new Bureau of Ocean Energy Management, said he was impressed with the progress the industry had made on spill response and containment since the ban was imposed. Bromwich said, "I think it is highly unlikely the moratorium will be extended beyond November 30th." He said a report offering recommendations on possibly lifting the moratorium early would be completed by the end of September. He said it might take Ken Salazar a few days to a couple weeks to act on the report. Personally I believe the administration will drop the ban 2-3 weeks before the election in hopes of gaining back some of the votes they lost on the ill-advised ban.

The Dow traded on both sides of zero several times today but gave up 50 points to a sell program in the last 20 minutes to end the day with a -17 point loss. Considering the gains over the last two weeks I consider this a perfectly acceptable loss. The Dow has been up eight of the last ten days with a range of +650 points from the August 31st low through today's high. To give back 17 points is a pinprick. The Nasdaq added another day of gains and the Nasdaq 100 continued setting new three-month highs. All this September euphoria could stop at any time but sentiment is definitely improving. The key test will be how quickly the next dip is bought.

The morning dip today to initial support at 10,500 was bought instantly but it was not much of a dip. We need a real dip to accurately determine how much staying power the bulls have as this rally starts to grow old.

The S&P-500 is up +7% for the month of September and edging closer to critical resistance at 1130. The 50% retracement level of the March 2009 lows is 1121 and that functioned as support this afternoon. This would be a good spot to launch an assault on 1130 but I don't know what the bulls are going to use as a catalyst. There are no economic reports tomorrow that normally generate that kind of momentum. There is more risk of negative economic surprises than positive ones this week.

The S&P is overbought but there appears to be no concentrated effort to sell it off. The 80-cent decline today was neutral but given its +7% gain for the month I still think it was a bullish performance. The real test will be 1130. That could be a tough barrier to cross.

S&P-500 Chart

The Dow stalled at downtrend resistance at 10,525 but there was a valiant effort to move over that level intraday. I believe the minor loss on the closing sell program was a victory for the bulls. Support should be 10,500 and the 200-day average at 10,452. If the Dow can move over the downtrend resistance the real battle will be at 10,700 and the August highs. I would expect a major stalemate at that level.

Dow Chart

The Nasdaq Composite is lagging the Nasdaq-100 by a few points and a resistance line. The Composite has a significant resistance hurdle at 2300 and it was solidly rebuffed at that level today. The corresponding level on the NDX was 1900 and the NDX is already well over that level. The big caps are definitely leading the charge. The Semiconductor sector has gone from zero to hero in the last week and propelled the techs higher. The SOX has rallied +6.4% from its lows in only three days.

The real battle here is going to be the 2300 level on the composite. That is the make or break level that will determine the success or failure of the rally for the week. Support is well back at 2225 so any retreat could be painful.

Nasdaq Composite Chart

Nasdaq-100 Chart

Semiconductor Chart

In summary the market is tired but refusing to give up. The bad news bulls may have some disappointing economics to climb over this week. The potential for negative news outweighs the potential for positive news. However, recent reports have been surprising to the upside even if it is just slightly. I would continue to buy the dips until proven wrong. There is still a lot of pessimism over the September rally and that should keep the shorts in play.

Despite the Dow loss today there were far more new highs (353) than new lows (50) and volume did pickup at 7.1 billion shares. Everyone is still not committed to the rally but individual stocks are starting to outperform and funds will eventually have to chase performance ahead of the quarter end, which is only two weeks away.

Jim Brown