It does not pay to get bearish on this market. Not yet, anyway.

The Dow was down just 14 points on Friday, which set the stage for the surprise rally on Monday morning. The dollar weakened about half a percent over the weekend. Since U.S. equities are priced in dollars, the declining greenback creates buying pressure, since shares look cheaper to overseas buyers. We think this trend is likely to continue until the Dollar Index falls to its 2008 low, about 5% lower than Monday's close.

Meanwhile, the Fed is also talking the dollar down. Over the weekend, St. Louis Fed President James Bullard stated that the Fed should continue to buy mortgage-backed securities past the first quarter of 2010, when those asset purchases are due to expire. This action helps keep mortgage rates low and lower rates weaken the dollar. This is particularly true at a time when comments from the European Central Bank reflect discussions on ending the liquidity surge by raising rates. Consequently, the euro gained 1% on the dollar on Monday.
 
The dollar’s decline is coinciding with normal end of year bullishness. At the same time, due to technical resistance, we think a trading range is more likely than an outright rally in the Dow here (see chart below).

The tech sector, however, is threatening to make a new yearly high. We like the charts of Apple AAPL and Bidu BIDU for that reason. Although valuations in the sector are steep, tech is the anti- financial play and demonstrated remarkable resiliency last week in the face of a major downgrade. Institutions are not willing to bet against Barclay’s economists, who are forecasting a steady increase in U.S. GDP through the second quarter of 2010. Tech is one way to play that. Energy and commodities are also being supported as recovery plays.

MARKET CALLS
There is considerable resistance for the Dow in this area due to a cluster of Fibonacci projections and the downtrend line from the October 2007 high. This technical resistance would be expected to act like a brick wall, preventing a further advance in the Dow.