The market headed down out of the gate this morning following Asia and Europe and mixed-in with Dubai worries; country credit rating downgrades; and, a strengthening dollar which weakens the “dollar carry trade”. But then the president made a curious speech stating among other things, “We must spend our way out of” this recession. Since this White House, like so many others before, read poll data and with the public very much against more spending and higher deficits, it made no political sense and perhaps exacerbated further selling today. And yes, that’s just a guess; but, the 2:15 Buy Program Express didn’t make it out of the station today.
Before the open this morning, came a bullish prediction from GS: “The S&P 500 may rally a further 13 percent to 1,250 by the end of next year as interest rates remain low, revenue grows and investors pour money into U.S. stocks. Continued profit margin resiliency from prior aggressive cost reductions should drive strong returns in early 2010 and push the S&P 500 towards 1,300. Equity investors will begin to rush for the proverbial exit ahead of what consensus believes will be the start of an interest rate tightening cycle.”
So, the rally we’ve seen is based on financial engineering but not job growth or real production gains. At least that’s what one can infer from the prophets on high at GS as they continue “God’s work”.
Volume was heavier than yesterday which isn’t saying much while breadth was highly negative.
DOLLAR VS COMMODITIES
The US dollar has begun to firm over the last few days and for the first time in quite a while is now trading “above” its 50-day moving average.
Notice that the dollar is beginning to break out above some key resistance levels (light colored blue lines). I am not comfortable at all in declaring the beginning of a new uptrend in the dollar, but even this small rising dollar event is having a noticeable effect on the commodity laden S&P 500 index, which looks to be forming a topping pattern.
Any strength in the dollar means weakness in the commodities. Crude oil prices peaked at $82.50 with oil now trading at $72.76 on the nearest futures contract. Gold has corrected $53 since the dollar has strengthened over the last week.
As you can see from this monthly chart of crude oil prices, oil has been unable to penetrate above its monthly middle Bollinger Band line and is now forming what also looks like a topping pattern.
I am glad to see this, though, as crude oil prices above $80 a barrel is ruinous to our economy and will offset any stimulus efforts and will only cause more troubles for the banking industry, more mortgage defaults and stress on corporations.
So far Gold has suffered a minor correction, but does this correction have more downside?
As you can see from this chart, the 14-day RSI values had reached into 80%, an extreme overbought condition. At a minimum, a test of the weekly middle Bollinger Band lines at 1041 is likely, which is about $100 an ounce lower. The weekly stochastics are just starting on the downside, so gold buying on dips is not recommended until the intermediate cycle has fully discounted current gold prices.
As I have repeatedly stated, there is a huge short position on the dollar from all parts of the world and among all levels of investors. These short dollar positions have done well for them in 2009 and if these short dollar gains are threatened, then expect to see big short covering spikes in the dollar – and consequent selling in commodities and equities.
Time for continued caution here – don’t buy the dips on this sell off yet.
A weak day as Dubai’s problems resurface and the dollar rallied accordingly. This challenges the previous cozy “dollar carry trade” where commodities and higher beta EMs prospered. Perhaps it’s just a temporary correction in that trend especially coming at this year-end period where traders hope to close their books and go on holiday.
Again, there’s not much economic data until Thursday and Friday. Until then we’ll get more jawboning from the Fed, Treasury and, I guess, the WH.
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