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There’s been a litany of things bothering investors in 2006: high energy prices, Fed interest rate policy, the housing bubble, the dollar, Iran and more recently, the 9/11 anniversary and more. Over the past month many of these concerns have, at least temporarily, eased.

One of the problems facing retail ETF investors continues to be an inability to short some commodity and currency ETFs. United States Oil Fund ETF (NYSEARCA:USO) has been particularly difficult, denying many investors one of its promised benefits. Nevertheless, energy prices are down roughly $10 per barrel over the past two weeks.

The Fed “paused” and so have bond prices. Shrewd bond investors ran prices higher before the pause and have since been relatively quiet as bonds were overbought. A successful treasury auction today lifted confidence and prices.

Evidently all the bad news for housing has been digested and built into prices. Despite more bad news all last week, streetTRACKS SPDR Homebuilders ETF (NYSEARCA:XHB) has been on an upward tear. Why? Because some “value” oriented computer models are buying based on price to book and low P/E’s. They don’t care about the news, as long as it fits their model. However, there is no doubt that over the past few trading sessions big buyers have been in the ETF buying with both hands. Fortunately, we exited our short positions over a month ago. Don’t fight the tape for now.

Meanwhile everyone and his cousin have predicted a fall in the dollar. Most have been caught several times leaning the wrong way.

And, currency discussions usually involve a conversation about gold prices as well. After a major rally, gold has fallen, following energy prices lower, and a perception that the commodity bubble has been pricked. Importantly to many observers, on daily charts, gold has broken its 200-day MA.

In mainstream equity markets, NASDAQ 100 Trust Shares ETF (QQQQ) has been “the” laggard. Why? Because the sector overall is more sensitive to interest rate policy than other sectors. With the Fed pause came a rally followed by more economic data, indicating perhaps the Fed wasn’t done yet, and the market sank again on uncertainty. The rally today is the result of a belief that falling commodity prices mean the Fed is done. How high can we go? We’ll soon find out as overhead resistance from the trading range is near.

This is the kind of day where bad news is completely ignored as trading programs kick-in. Get out of the way!

All this action—and we still have options expiration and more data to wade through. Today saw a respectable increase in volume, but not overwhelmingly so. What we experienced was a “connecting the dots” relief rally as previous troubles overhanging markets eased and bullish program trades squeezed shorts.

Disclosure: The ETF Digest has positions (long) in XLU and IYR only.

Source: David Fry's Daily Market Outlook: Tuesday, Sept. 12, 2006