All three major indices set new yearly highs on Monday, which the financial media regards as particularly bullish. One reason is that the S&P 500 has been lagging the pack. With ‘confirmation’ from the S&P, some market technicians are breathing a sigh of relief. Hummmm.

Unfortunately, we do not concur with the rationale for the enthusiasm. As the market moves higher, we are getting more cautious, not more bullish. We have two technical resistance zones in mind, one is Dow 10,500 and the other is Dow 10,800. These levels operate like the orbits of electrons around an atomic nucleus. Electrons are stable at these orbit levels and don’t spend much time in transition. Markets act the same way. If the Dow can break through the 10,500 zone, we expect it to travel to 10,800 rather quickly. Time will tell.

At his annual speech at the Economic Club of New York, Fed Chairman Bernanke reiterated his commitment to keeping interest rates low until employment starts to pick up. Consequently, gold hit a new high, crude advanced a few dollars and the dollar itself fell modestly, posting a new 15-month low. We expect crude to move up to the $90/bbl level and for the Dollar Index to head about 5% lower, to test the 2008 support around 71.
 
This movement downward in the greenback will help support equity prices through the end of the year and perhaps into the Jan.-Feb period. Consequently, we don’t expect much selling pressure in the market before that, as fund managers want to make up for a terrible 2008.
 
In SpearChat yesterday we had questions about a possible bubble in commodities, particularly gold and crude. Greenspan is right; bubbles are particularly hard to identify in real time. They have a sneaky way of appearing justified. For example, when we actually had the bubble in crude in 2007-2008, no one identified it as a bubble. In fact, institutions such as university endowments broke with their conservative traditions and rushed to invest in commodities. As a result they lost about 30% of their portfolio value.

Right now, the talk of a bubble in crude, while it is around half its 2008 peak, seems misplaced. Other commodities are also trading well below peak levels. Gold has risen 16% above its 2008 peak. That’s not a bubble, either. In our view, the next bubble will be in Asian small caps. That’s why we want to own them. The players are just now coming onto the field. We are still very early in that game.