Traders have turned bullish, but I'm sitting out

The Dow 30 Index was up strongly (+2.9 pct) to 10686, but 10700 is a key technical resistance. And, because of today's high and rising global inflation rate, Dow 11,000, which is next, cannot be easily supported with a 20 PE multiple.

So, call me foolish or whatever, this is one dance I'm sitting out, Dow 11,000+ or not.

After two straight weeks of having 18 winners, this past week the Dow 30 shows 26 stocks up and just 4 down. In my eyes, that's too close to perfection.

Lets take a look at what happened:

The five big winners (out of 26) last week:

• AA, up +6.00 pct: It had been +4.8 pct a week earlier due to lower energy cost
• C, up +5.26 pct: That's what happens when Sandy Weill visits the Kingdom
• INTC, up +4.75 pct: Poor fundamentals, but this rally is all about Media and Momentum
• DIS, up +4.23 pct: Readers liked my heads-up a week ago when DIS was also up +4.2 pct
• UTX, up +3.53 pct: Hey Bush is going to Beijing to trade elevators for Renminbi

And, the only losers on the week were:

• GM, down -8.55 pct: How many straight weeks on the losers list? Four!
• XOM, down -2.38 pct: Tough day at Congress, and with oil down -6 pct in 2 weeks
• DD, down -1.87 pct: This one was up +9 pct two weeks ago. They don't always rocket
• HPQ, down -0.04 pct: Almost a gain; MarketWatch is hyping it though

As to the U.S. Sector ETFs: My positioning remains as follows (20 pct invested; 80 pct cash) with the portfolio weighted as follows against the indexes:

• Energy: Market-weighted: short-term pullback now; then blow-off rally
• Basic Materials: Market-weighted: sector is over-bought now; ready for pullback
• Industrials: Market-weighted: range-bound from April; topping, then bear
• Consumer Discretionary: Market-weighted: over-bought Friday; more strength to come though, for now
• Consumer Staples: Market-weighted: a little over-bought; but a place to hibernate, if you have to be long bear markets
• Healthcare: Market-weighted: also good defensive place to hibernate
• Financial: Under-weighted: more over-bought than anytime since 1Q04
• Technology: Market-weighted: premature bull move in SMH (+8.0 pct 2 wks)
• Telecom Services: Market-weighted: long-distance & fixed line are dead
• Utilities: Market-weighted: bond yields are making the bear growl here

U.S. Bonds: Just as forecast a week ago, the small bounce (aka bull trap) happened; but yield curve inversion prospects are growing, which means recession prospects are growing. In any event, the prospects of a stagnant economy plus higher inflation will be a disaster for bonds and stocks, so keep your eye on the U.S. treasury yield curve

Commodities: Continued pullback but prices are still high, means high raw material costs to producers, which have to be passed on to consumers, who then require higher wages (inflationary). Emerging economies will continue to demand metal, oil, food, so even recession in Europe (likely) and North America (possibly, but still unlikely) would not collapse commodity prices; stagnant economy plus rising prices = Stagflation

Oil & Gas: NY crude dropped to support level at 57-58 ($57.53) as forecast; likely to range trade unless global economy goes into recession (unlikely), and may rebound with onset of winter, or further problems in Middle East and Venezuela

Gold Bullion: Continuing USD strength, but gold is rallying as forecast (short-term forecast was moved to $500 a week ago); long-term outlook is now $600+; inflation stats are materially misrepresentative; the U.S. money supply is skyrocketing; and fiat currencies (USD in particular) are rapidly depreciating against the value of gold

Goldminers: Still buying any dips, and looking to buy smaller caps, as gold Dec-05 contract was back to 470 Friday afternoon; I am awaiting the upside breakout for the shares

Forex: USD continues strong because foreign central bankers (playing the musical chair game regarding known inflation vs. feared recession) don't wish to raise rates; but avoiding short-term pain often leads to long-term problems; Bush trip to Beijing in a week will give us the key to the riddle

To me, in addition to CBS 60-Minutes doing a puff piece on Jim Cramer tonight, where they kindly overlooked how Cramer was fired from CNBC a couple years ago for front-running his on-air stock picks, and then welcomed back for reasons unknown, the big stories of the past week were:

1. $Gold was up +2.65 pct W/W to 468.75. I called this right for the Metal Guru column. When I looked at the Federal Reserve Bank website report of the growth in the M1, M2 and M3 money supply for the recent quarter, it does not shock me that gold is rallying, and about to go higher
2. The Fed announced Thursday they were dropping the M3 money supply statistic in March 2006. That should be clue number one that the Fed is reflating and does not want Mom & Pop to see by how much and how fast
3. The U.S. bond market rallied right on cue. Last week in this space I wrote: "TLT was down again, but there may be a bull trap ahead". Reflation will kill the bond market
4. The trade-weighted USD index closed at 91.90, up +0.7 pct W/W, but on Friday was down -0.2 pct. In 9 weeks, from 86.02 early September, the $USD is up +6.8 pct, with no fundamental reason other than weakness in Europe. Now we'll have to watch what the People's Bank of China does after the visit to Beijing this month.