AHEAD OF THE FOMC

Commodity prices were called lower on the Monday opening as bear sentiment was fed by a stronger dollar. The other low yielding currencies of Switzerland and Japan were especially weak against the dollar as investors toyed with the notion that the Fed might be reluctant to walk away from Wednesday's monetary policy statement without mentioning the timing of a plan to walk away from an easy monetary and fiscal mix.

Although equity prices finished weaker, the rebound in commodity prices as they responded one after the other to underlying demand was notable. Most futures opened lower and spent the remainder of the day gathering steam.

The Conference Board's index of leading indicators also rose as was expected by 0.6% to indicate better prospects on a six-month view for manufacturing and metals demand. Front month gold futures prices slipped briefly beneath the magic $1,000 per ounce before rallying into the close.

A rally in the dollar arrived just in time to spook recent buyers of gold, spurred on by fears of inflation and a loss of value in the dollar. According to the CFTC's commitment of traders' weekly report last week, the number of net long positions in gold futures - those expecting prices to keep rising beyond this year's 13% gain, rose to the highest in at least 16 years.

What will be important to watch after Monday's decline in the broader stock market indexes is whether the dollar continues to react positively. Our reason is straight forward. While the dollar has been in freefall while stocks have risen on economic optimism, the opposite is unlikely to hold. That's because there is more than a grain of truth in the recovery story. Stock prices are pulling back only because investors are sensing that perhaps they over did things just a little. It's not as if they are entirely wrong in pushing overly depressed stock prices higher.

What we're saying is not to expect a crashing slide in stock prices predicated on investors having called this terribly wrong. And the flipside here is that the dollar's recent rise is more than likely nothing but temporary until investors work out that any rise in risk aversion is attributable solely to profit-taking on equities before the rally continues.

Did you notice on Monday how bond prices rallied before turning tail before the end of the day? As we say, it's not a rise in risk aversion that's taking center-stage. It's just profit taking after a phenomenal rally lifting the S&P 500 index 57% off its March lows.

The Supreme Council of the Secret Order of Jurojin

Tyche Research