Tuesday, December 15, 2009

Dollar Surges Higher; Stocks Remain Flat, Directionless

Yes, I did make up the word "directionless" from the title above. So what :) That's not important, what's important is the US dollar's continued surge higher. The rally appears a bit overbought and momentum waning but the dollar was so oversold and over-shorted on a long term basis that the current rally may be relentless, offering little opportunity to enter. I'm still cautious of a snap back decline in the dollar, but with such a significant change in trend to the upside, surprises will also be to the upside. The dollar strength will continue to put a lot of pressure on equities and make it difficult for them to sustain any kind of rally, if not outright make them fall off a cliff. Continue to watch the dollar rally, it is the stock market's biggest enemy.

The S&P appears to be finishing up a 5 wave advance, if it hasn't done so already. If so, it may mean its final rally has ended, or will at least correct a bit of the 5 wave rally. Tomorrow is the Fed announcement so some volatility later today and the rest of the week is highly possible as investors jockey for position around the fed statement. A sharp erradic rally in stocks would fit nicely into the "blowoff top" scenario I mentioned in earlier posts, so I'm watching for that. If that does occur, it would be a good signal that "the top" is probably forming and the rally will be quickly reversed. That final spike will be the market's last attempt to eliminate the last of the already severely battered bears before it tries to collapse without them.

So the bottom line is that the dollar rally is very bearish for stocks, and a continuation of the dollar's uptrend should lead to the stock market's top and reversal. With the consolidation of the past few weeks in the stock market, I wouldn't be surprised to see a sharp final rally into the wave 2 or B high that will be quickly reversed. The Fed statement tomorrow MAY be that catalyst. Above all else, I'm looking for reversal patterns and 5 wave declines to signal a top is in. Until then, I continue to be short term neutral the stock market.

My positioning remains the same as yesterday.


JD said...


Is there anything "fractal like" in the wanimg momentum of the March to present rally in S&P as seen in last evenings chart?

It appears the market moved to lesser degrees above trend, ever smaller deviations from trend, and then dropped below trend and is still making smaller deviations.

Until perhaps it just drops completely away from trend, ie a wave 3 of higher degree?

I don't recall seeing fractals expressed this way though it may all be part and parcel of the waves we've seen in this wave 2.

Rob said...

Hi Todd,

Do you have a theory on the seeming asymmetry of the dollar/equities relationship? Until recently, every dump of the dollar was accompanied by a big spike up in equities. But since the dollar started rallying, equities have barely fallen; now it seems to take a big spike up in the dollar just to keep equities flat, and stocks melt up again with the slightest dollar retrace.

I can think of two possible explanations. One would be that equities have had so much upward momentum that it's been a lot easier to push them up than down. The problem with that idea is the momentum shouldn't be so powerful anymore after the stock market being relatively flat for the past few months.

My other theory is that the dollar carry trade still has to unwind more in order to "trickle down" to equities; dollar shorts may not yet be covering on a large enough scale that they have to sell equity holdings to raise the funds for their dollar short covering.

Would be very interested to hear your thoughts. Thanks again for your excellent posts, I always look forward to reading them.

Todd said...

JD, I'm not entirely clear on what you're asking, but if you're asking if there's a parallel between the market action now and what led to the March 2009 bottom then the answer is yes. The churning sideways action from October 14, 2008 to February 9, 2009 is quite similar to what we're seeing right now in the market. And after February 9th, the market broke out for one final new low before going on the insane rally we are in now. I am thinking similar action will occur now, only inverse of course. I think we will probably break out of this consolidation action soon and rally hard toward 1200 (S&P), then we'll top and reverse sharply. This is not required of course; and we can crash at any time. But this is just my best guess.

Hope that helps. If not feel free to email me charts and stuff to help me better understand your question.


Todd said...

Hi Rob, there are lots of possiblities as to why this action is occuring, and I by no means think I know for sure. I think one of the reasons the dollar rallies lately aren't translating well into equity weakness is what you said in your second comment about unwinding the carry trades and short covering; also, major market tops and reversals of trend often don't occur with all markets reversing in unison. Oftentimes one market will top and reverse, then another, then another, while other markets rally. Eventually they all pick up speed and reverse. This is what's occuring now, and the dollar is no exception.

My theory is that people want a bull market and bubble somewhere to get that big quick cash. So when a market starts lagging or not performing well, then they rotate to another market. We saw this when the XLF (financials ETF) and the Russell 2000 small caps topped and the Dow and S&P and Nasdaq rallied to new highs. It looked like a shifting of money from the high risk trade to the more conservative trade. Then gold spiked as people were betting on a gold bubble. But now that reversed and the dollar has bottomed. So money is leaving commodities and moving to the blue chips in the S&P and Dow while the dollar destroys commodity values with its rally. Eventually the stronger dollar will hit all asset prices, but it hasn't reached that critical level yet, probably due to what you said in your second comment. This shift in money is what's holding the market up, but eventually there will no where to hide their money and all the markets will give way. The dollar rally will be the biggest challenge for this market rally and will ultimately win and force stock prices down.

So once the rotation of funds, looking for the next big bubble and fat gains, is over, the overall market should top. The bulls are running out of room to hide, and the stronger dollar is really pinning them in a corner now. The pressure of a stronger dollar will eventually bring down the whole house of cards. But the bulls are giving it everything they have to keep things afloat and fool the public and themselves that they're actually in a bull market.

Just my thoughts. I welcome any further comments from you as well.