Tuesday, December 8, 2009

Stock Market in a Range, but Bearish Commodities and Bullish Dollar Will put Downside Pressure on it









The stock market was very weak today with internals registering 2.24 down stocks on the NYSE for every 1 stock trading up, and 82% of all NYSE volume to the downside. The stronger dollar and weaker commodity action is putting severe pressure on the stock market. This all started with the dollar rally after the good jobs report Friday. So if you follow financial news and feel it moves the market, then think about this: the stock market rallied primarily on dollar weakness as you can see from the inverse tight correlation to the US Dollar Index (DXY). This is all happening when the so-called "recovery" is getting its legs. Now a great jobs number comes out on Friday and the dollar rallies because investors fear the Fed will raise rates sooner than expected. This causes stocks to sell off. So the stock market is rising on the hopes that the recovery is on firm legs but sells off when things get too good because the Fed might raise rates. So if good news and a good recovery won't push the stock market higher, what will? Darned if it does and darned if it doesn't. The bulls are in a tough spot here.

In the short term this is irrelevant. But what my point is-is that it's primarily dollar weakness that fueled the stock market higher from the March 2009 lows. With a weaker dollar, stock prices, not values, rose. The weaker a dollar is worth the more dollars it will then take to buy the same stock a few days ago. So the real story is the US dollar here. And it appears that it has formed a major bottom.

My attached S&P cash index daily chart shows the S&P in a range. Until that range is broken significantly and closed outside of, then we'll assume we'll be bouncing around here for a while. But with commodities topping and the dollar bottoming, the evidence is building that the breakout of that range will be to the downside, and perhaps soon.

Now look at the daily USD/CHF chart attached and notice the strong surge higher after several weeks of bullish divergence on the RSI. The last several weeks of the dollar's decline was not only very very crowded, but also had severely weakening momentum with every new low during that time as you can see from the RSI which failed to make new lows with price. Now the shorts are getting scared and covering their butts. The more the dollar rallies, the more shorts will get "squeezed" out of their positions. As crowded as this trade is, it would not be surprising if it just kept rising more and more with little break.

The last two attached charts are of gold. You can see on the intraday chart that gold has been massacred after its huge surge near the $1,230 level late last week. As commodities often do, it appears gold made a blowoff top and is now reversing just as sharply as it rallied. The count remains valid and gold should move inverse the dollar just as fast.

So I'm short term bearish gold and silver; short term and long term bullish the US dollar; and neutral on the stock market until we get a clean breakout from its range.

6 comments:

donatoloscalzo said...

with all the frutsrting gyrations of the stock market.......i think i will follow your approach.........

donatoloscalzo said...

with all the frustrating gyrations of the stock market i think i will follow your sensible advice..........

Anonymous said...

Great charts Todd,

I made great money shorting silver earlier this year. Unfortunately I have made only a little on this fall as I became to sensitive to loss from wave 2. I need to get my nerve back.

Rob said...

Todd, thanks for your excellent insight as always. Your point about the bullish case now being a Catch-22 nicely sums up how aged this rally is.

Todd said...

The rally has extended much farther and longer than I ever though possible. But that just strengthens my bearish stance, and makes me believe that the decline will be even more severe, at least in the beginning.

The key is to remain solvent, so a prudent approach is warranted while try to call this top. The worst thing in the world would be to know the big decline is coming, but go broke trying to catch a top just before it declines.

The action in precious metals is extremely bearish right now, and the US dollar is quite bullish. Things are turning........very slowly though.

Todd

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