At The FRED Report (

www.theFREDreport.com

), we have had a lot of questions regarding recent market action, especially as the market behavior we forecast last week has happened right away (see article "

Dollar Rally Can Bring Gold and Commodity Opportunities

"). We have been looking for a dollar rally and believed that would set up buy points in commodities and stocks, and these markets have moved down to price targets we forecast in the newsletter.

This has happened a bit quicker than we thought it might, but so far we view that as a positive.  Sharp drops are almost always bullish and often result when sentiment indicators such as the put/call ratio shows a high level of calls purchased. We publish our put/call indicator in our Fred Report Monthly Review (

www.thefredreport.com/categories/monthly_report

). Interested readers can email us at

research@thefredreport.com

and we will send a chart of the indicator if you wish.

The reason for our forecast last week was that traders became overly bullish. The key point to remember is that when sentiment becomes overly bullish, an event often happens to cause these traders to change their mind at the same time. A quick look at the indicators suggested the dollar was likely to rally - which suggested a news event that affected the dollar was likely to occur. This has turned out to be two events - Chinese inflation and Irish debt issues. So, where does that leave the markets now?

We feel that this drop is a buying opportunity for stocks and commodities (DBC - Powershares DB Commodity Index Tracking), and that, just as the decline was quick, the opportunity to enter is going to be relatively quick

. To illustrate this, let's take a quick look at the dollar.

Readers can see that the dollar is quite close to resistance. We expect the dollar to fail in this area and if this occurs stocks and commodities should resume their rallies into the end of the year. We note that the SPY (SPDR S&P 500 Trust) has come down to support, as has the OEF (iShares S&P 100 Index Fund ETF). The OEF is important because many of the index options that expire on Friday key off of the S&P 100 index.

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Should the markets rally and the dollar decline, there are some stocks that should benefit and move up into the end of the year. Right now, we would stick with blue chip names that have international exposure, such as McDonalds corp (MCD) and Coca-Cola Co (KO)  (these appear in our Sector Review -

www.thefredreport.com/categories/Sector_Review

). Commodity related names should also do well in this environment. We have Chevron Corp (CVX) and Newmont Mining Corp (NEM) in our Sector Review as well.

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Obviously, forecasting is difficult, and The FRED Report ALWAYS advocates use of risk management techniques. Sometimes conditions change, and forecasts don't pan out! But, given current conditions,

we expect a solid year-end rally in the stock market which should start in the next week or so

.