Dollar Donning Rally Cap?

Index Close Change
Dow 8781.35 +179.97
S&P 500 951.48 +18.26
Nasdaq Composite 1556.69 +46.60
Nasdaq 100 1172.58 +42.53
Russell 2000 427.61 +9.21
Semiconductor Index (SOX) 365.34 +20.99
Bank Index 822.54 +17.15
Amex Gold Bugs Index 142.29 +0.78
Dow Transports 2416.85 +33.49
Dow Utilities 248.80 +3.90
NYSE advance-decline +1,454 -392
Nikkei 225 8120.24 -107.08
10-year Treasury Bond 3.40% +0.068

Editor's note: This column, which reflects market activity from the day before, originally appeared May 27 on RealMoney.com. To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

While we were on holiday, the world markets saw mixed action, with Asia rallying Sunday night but most markets under pressure last night. The dollar took a beating all weekend long, and then fell as much as 0.5% (to $1.19 dollars per euro) in the early going today before turning green. Conversely, our stock index futures, which were indicating a decline of about 0.5% preopening, marched straight higher as soon as the market opened, such that a couple hours into the day, the Dow and S&P were up 1%, and the Nasdaq was up almost 2%. (Also up, vs. expectations, were the numbers for new-home and existing-home sales, while the consumer confidence reading was slightly less than expected.)

Clues in the Catalyst-Less Sizzle: The early-going action was so strong as to make me pay extra-close attention. One of the things I noticed right off the bat was the 8% moonshot for Micron Technology ( MU), the old flying pig from days of yore, in the space of about an hour's time. The rest of tech was also on fire, led by the party in Internet land. Maybe folks were busy writing the epitaph for this phase of the dollar's decline and figured everything was wonderful, so why not pile into stocks they thought might do well.

I don't know if that's the story they were going with, but I do know that in the past, when tech stocks sizzled like this for no reason, it has often meant that "something is up." Consequently, I covered the tiny amount of shorts I had put on in the previous week. So, those are my real-time thoughts and actions, for what they are worth.

In any case, the market continued to chug higher over the course of the day. From about midday on, the rate of ascension slowed somewhat, but we did go out on the high tick. Folks can check the box scores for the particulars, but suffice to say, it was a day of wild action. The bank stock index was up a couple percent. The biotech stock index was up 5%, though that couldn't quite match the mighty, mighty SOX, which was up nearly 7%. All in all, it was quite a display of bravado on the part of the bulls. Volume was pretty chunky, as well. So, it looks like the path of least resistance continues to be up, as the corrections to the downside seem to inflict little damage.

A Currency Wait-and-See: Meanwhile, it will be interesting to see if the dollar comes in higher tomorrow. I've been expecting that at some point, there would be a sharp pullback in the euro, i.e., a rally in the dollar. I have wanted to learn how stocks and gold would act in that environment. I'm pretty sure folks would take a rallying dollar as another reason to party in equities. I imagine gold would be sold. If that starts to play out, it will be worth paying attention to the proceedings as they unfold.

Away from stocks, the dollar reversed its aforementioned weakness, closing up 0.5% against the yen and the euro. After having been strong earlier, the metals wound up closing lower, with gold and silver down slightly.

Disinfecting With Value Investing: Turning to the news -- not that news matters much in an environment where the tape is so wild -- today's Wall Street Journal carried an interesting article called "Tech Orientation" by the always-thoughtful Jesse Eisinger. It's a look into how SARS has affected Asian tech companies, and what that could mean for tech here. Echoing a point I've made recently, Jesse says people have failed to price in the risk that SARS could hurt tech stocks overall.

He begins: "There are signs that SARS is penetrating technology stocks' immune systems." Then, after stating that Novellus ( NVLS) could possibly have bad news tonight, he writes: "If you want to know what the future of U.S. tech companies holds, look East. In Asia, production has slowed sharply as SARS has slowed down the economy, inventories have built up, and consumer demand for PCs and cell phones has fallen off drastically. For many tech companies, such as Intel, Asia had been the last growth engine." Even so, he notes that "Applied Materials is trading at 105 times the estimates for fiscal 2003, ending in October." So people have blinders on to just the possibility there could be trouble here.

Hunting the 'Sunny' Side of SARS: He goes on to say that memory-chip prices are falling, PC inventories in China are way up, Taiwanese motherboards saw disappointing bookings in April and May, and handset shipments by Korean companies fell more than 15% in April vs. March. His conclusion: "That should put Texas Instruments Inc. squarely in investors' sights." Nevertheless, he leaves a little room for optimism in his last graph: "Perhaps the bulls will turn to the argument that there will be pent-up demand when the SARS fear passes. It's possible. And after the stocks slink to reasonable valuations, they might be worth buying." I anticipate the same SARS-based pent-up demand argument, though I am not so sure it will necessarily hold up. This is part and parcel of folks' need to make up stories, just like the one about a weak dollar being good for us.

Finally, in the inside-baseball department, Floyd Norris' column in today's New York Times ("Market Place: Some Circuitous Tax Changes for Those Who Sell Stock Short") is one that short-sellers should pay attention to. He points out that when a new provision of the tax law goes into effect a year from now, dividend-paying stocks may be more difficult to borrow. This pertains only to short-sellers, and only to dividend-paying stocks that have been lent out by taxable entities.

William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for TheStreet.com and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital had no position in stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of TheStreet.com. While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to bfleckenstein@thestreet.com.

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