Better economic news keeps biting into the dollar, and it could for awhile.
That trend is also propelling stocks, and on Monday, the S&P 500, the Dow and Nasdaq all closed sharply higher. They also all cracked big round numbers, with the Dow finishing up 1.25 percent higher at 9286, its first close above 9200 since November.
The S&P 500 pierced 1000, finishing up 1.5 percent at 1002, its highest close since November and 50 percent above its March low. Traders have been watching 1000, a psychological mile stone, and a level they think will bring in new buyers and where some traders will take some profits. The Nasdaq was at 2008, up 1.5 percent, its highest close since October.
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Meanwhile, the dollar index continued to slump, also to levels not seen since last fall. It was trading at 77.59, its lowest level since Sept. 29. As the dollar fell, commodities were fired up with big gains in natural gas, copper, corn and soybeans. Oil was also higher, rising 3 percent to $71.58 per gallon.
When it came to stocks, the commodities-driven materials shares Monday were the best performers, up 3.5 percent, while financials were 2.7 percent higher.
The gains in commodities since early July have been stunning. Copper rose 28 percent since July 8; gasoline gained 26 percent; oil is up 19 percent; natural gas jumped 19 percent, and platinum increased 13 percent.
Stock markets around the world have rallied right along. India is at a 14-month high; China, Mexico and Korea are at 12-month highs, and Brazil, Hong Kong and Singapore are at 11-month highs.
"I really think the key thing today is stronger than expected ISM and somewhat counter intuitively, we're in a world where better than expected U.S. data means 'risk on'," said Adam Boyton, Deutsche Bank foreign exchange strategist.
The Institute for Supply Management Monday said its index of factory activity rose to 48.9 in July, up from 44.8 in June. The number beat economists' forecast of 46.2 and moved the index closer to 50, the dividing line between contraction and expansion.
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"We had the flight to quality trade supporting the dollar (earlier in the year)," said Boyton. "The market really spent a lot of Q2 normalizing. We're now back in the world with commodities prices doing well. That's U.S. dollar negative. We're getting significant reserve building in emerging markets," he said.
Boyton said the trend of a weaker dollar could now be in place until the economy recovers enough for the Fed to hike interest rates. That could be in the second half of next year.
"We've never seen the dollar outperform unless U.S. yields are above European yields ... and then the other thing to really get the dollar rally, you need the U.S. fiscal deficit to come down," Boyton said. The euro edged up against the dollar and was slightly higher Monday at $1.4418.
Risk On! Oil Drill
M.F. Global senior vice president John Kilduff said Monday he now believes oil could reach $100 a barrel by year end. "Mainly, I think the rebound in China is for real. Their impact on demand and consumption are being underestimated and also the global rebound is going to get us back to the tighter energy situation we were in very quickly. Add in some dollar declines and geopolitical risks, most notably Iran and their nuclear ambitions, and you have the makings for $100 oil," he said.
Meanwhile, Dennis Gartman, founder of the Gartman Letter, said on "Squawk Box," that he does not believe oil will surpass $75 a barrel.
"There are just two trades right now: Economy rebounds. Economy falters," said Richard Bernstein, Merrill Lynch's former chief investment strategist.
Bernstein, in an interview after his "Squawk Box" appearance, was not exactly bullish but his outlook for stocks might be taken as such. Bernstein now heads his own advisory firm, Richard Bernstein Capital Management and is a contributor to CNBC.
"I think we're starting to hit a momentum phase in the market, which is not fundamentally based," he said. But, the market could continue to move higher for some time.
Bernstein though does see a few bright spots. First, he believes weekly jobless claims are the most important indicator, and they have shown some improvement. He also said the corporate earnings have been important — not for the record number of positive surprises, but for the lack of negative surprises.
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Negative surprises indicate an out-of-control environment where a company is unable to forecast its business. Positive surprises more reflect "companies are beginning to control their businesses," he said.
"Barring commodities prices soaring, and the consumer choking before they get their heads above water, then data suggests 2010 and 2011 could bring a very strong profit cycle," says Bernstein.
Bernstein said investors should be neutral or bench mark weighted U.S. stocks. One reason he remains cautious is the market leadership. "In July, the best performer was materials. How do we have a late cycle leader?" he said. He added that early cycle sector financials were not as active, and mid-cycle leader tech was popular early on in the market's move higher.
Bernstein said he still likes tech and consumer discretionary are worth a look, especially if unemployment claims continue to improve.
What to Watch
Tuesday's data includes personal income and spending at 8:30 a.m. and pending home sales for June at 10 a.m. Earnings reports are expected from Toyota, UBS, Archer Daniels Midland, CVS Caremark, D.R. Horton, Duke Energy, Rowan, Cognizant, and PPL. After the bell, Kraft Foods, Whole Foods and Electronic Arts report.