David Fuller's view I mentioned in my previous portfolio section and also Audio that a stock market reaction might have commenced yesterday. This afternoon I opened a new hedge short in the S&P 500 Index, selling the September contract at 1100.13, including spread-bet dealing costs of 1 point.

Until we see some evidence that the stock market pullback commencing yesterday in response to a short-term overbought condition is over, I assume that further moves to the upside are mostly on hold for a while. If this is just a short-term reaction and further ranging consolidation, as I suspect, then most share indices should find support well above their July lows. However if I am underestimating downside risk, breaks of the July lows would confirm a more serious correction.

Given the recent correlation between stock markets and commodity prices, while the reaction in equities persists, it should dampen commodity long position speculation. Additionally, concern over commodity price inflation, which I have expressed recently, will subside temporarily although it remains a medium to longer-term risk. The USD, which I described as technically oversold in last nights Audio, should experience a technical rally while stock markets are in retreat. The US Dollar Index has checked a 9-week downtrend with this week's upward dynamic. (Please listen to the Audio for a more detailed discussion.)