Key observations:

1) Equities are overbought and will likely pull back  in the next day or so but have strong support not that far below. The big volume in the last two days is confirmation of the move.

2) Gold and gold mining stocks have come back but are near strong support. They will either break this or begin to rally very soon.

3) USD rather than weakening appears to be in a symmetric triangle consolidation. If this breaks higher then it will be confirmed.

4) Bonds look bearish though we may get a near term pop higher.

A possible scenario that is consistent with equities, gold, USD heading higher (after a near term pull back) while bonds drop (interest rates rising) is the appearance of inflation. Or, one or more of the patterns we are seeing fails. The next week should tell the tale.

Following are the charts of USD, SPX, Gold, HUI, TLT(weekly):

USD 03/10/2010

SPX 03/10/2010

Gold 03/10/2010

HUI 03/10/2010

TLT 03/10/2010

Macro Background:

The Greek crisis is passing. Yes, there are still problems but the bond auction last week went well with three times the number of subscribers as available bonds. The Europeans will defend the Euro but they may do much of that defense through legal actions rather than by throwing money at the problem. Already we have seen investigations launched into the companies that advised Greece on their CDS’s. The Greek Government banned any hedge funds or hedge fund proxies from bidding on their bond auction. Investigations are being launched into hedge fund and proprietary currency trades that sought to short the Euro. None of these activities are illegal but the message is “attack our currency and we will come after you”. Given the anti-trust rulings that the EU has handed down against Microsoft, Intel, etc., funds should have no doubt about the EU’s willingness to go on the attack.

As a result, we should see renewed strength in the Euro and a decline in the dollar.

While sovereign debt issues remain around the world, the Greek crisis probably shows that nothing is about to come unglued immediately so the risk trade will start coming back on. In addition, during this period gold has held up very well and it and its miners look ready to start moving up. This next bull leg up in gold should make new highs in the $1300 range or about 14% appreciation. Many of these miners then have 25-30% appreciation potential from here if they recover their old highs.

Energy stocks look set to rise after we get a consolidation in equities this week. Specifically the oil services and the drillers.

In the past week or so we have noted a few interesting stories around the world. Chinese manufacturers are apparently having great difficulty in some areas hiring sufficient workers to support the orders that are flooding in. They are offering bonuses and pay increases to attract the necessary people.

BHP negotiated a coking coal contract 55% above the previous level this past week. While it is only in effect for a single calendar quarter it is indicative of the pricing power that basic material companies are gaining.

Steel producers are raising prices as are potash producers and iron ore producers.

During the 1990’s the US imported deflation through cheap Chinese goods as we outsourced our manufacturing to Asia. This allowed the US to enjoy a golden period of solid growth without rising inflation. We said last year and we will say it again, the US will import inflation from Asia in the coming years and we will be importing it into an environment that is awash in cheap money. That is a recipe for runaway inflation.

Charts: USD, Gold, HUI (Junior Gold Miners), SPX, XLB (basic materials SPDR), XLE (energy SPDR), WTIC, Copper, TLT (Bonds)

USD 03/05/2010

Gold 03/05/2010

HUI 03/05/2010

XLB 03/05/2010

XLE 03/05/2010

WTIC 03/05/2010

Copper 03/05/2010

TLT 03/05/2010

This week we have a sale of Greek bonds. Depending on how that plays out we could see a negative market reaction or a shrug. We doubt it will be possible for the sale to generate a relief rally.

Also this week the February employment numbers come out. Given the continued misses on the weekly reports it is unlikely we will get a positive surprise. The possibility for a negative surprise seem pretty good so be very cautious ahead of that report. Given the backdrop of increasingly negative economic reports it would seem that we may well be heading for a sell-off. Looking at the charts it is possible the S&P is in fact turning the corner from the “B” wave into the “C” wave. That said there is plenty of upside potential within that to kill any short position.

Gold moved up nicely Friday off of its 50 day MA and the dollar decline. We remain cautious though as this rally has not had the oomph of last fall’s move.

Hopefully this week will see some resolution in one direction or another.

USD 02/26/2010

SPX 02/26/2010

Gold 02/26/2010

Copper 02/26/2010

WTIC 02/26/2010

More later…

While all of this is going on US consumer confidence is collapsing, new some sales are collapsing, and the incidence of problem banks is rising rapidly. As Greece is still 2-3 weeks away from their next report out and as they need to have a bong auction soonish, it would appear that the charts and fundamentals are aligning that the market should make a move within a week, i.e. in 0 - 7 days and it is likely to be down. We remain in cash but will likely short heavily in a breakdown (see chart below).

As for energy stocks - we really want to buy energy, really we do but there are three issues that are in the way: 1) we keep accumulating crude oil every week in the EIA report, 2) too much talk of bubbles in China and too many rosy equity analyst reports about how this or that oil stock is going to double this year makes us very nervous about energy, and 3) they just are not performing very well - and this has been the case for sometime. So, o energy stocks right now.

Below are the charts for USD, S&P, TLT (bonds), and gold.

USD 02/24/2010

SPX 02/24/2010

TLT 02/24/2010

Gold 02/24/2010

Following are the annotated charts for the USD, NYSE Comp, Nasdaq Comp, Gold, Copper, and Crude Oil.

USD 02/19/2010

NYSE 02/19/2010

Nasdaq 02/19/2010

Gold 02/19/2010

Copper 02/19/2010

Crude Oil 02/19/2010