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Gar's Market Blog
Outlook for Thursday ( 11 February 2010 )

It's All About the Dollar

Whether you realize it or not, everytime you have made a trade today, especially a daytrade, you were actually trading the US dollar and nothing more. For the last several months---and with only a handful of exceptions---the market has been trading in inverse lockstep to the US dollar, almost tick for tick.

To prove my point, observe the following comparison of the dollar vs. the S&P-500 for today's action:

Notice how the S&P (the blue line) trades in nearly perfect "reverse" lockstep to the dollar, and this was only today! Whether you like it or not, if you traded any stock today, your wins or losses have been at the mercy of this currency action.

I do not profess to fully understand the phenomenon, but this has been going on for months. A more pertinent point is that the genuine "investor" has all but left the market, and this is evident by the anemic daily volume (the NYSE volume has been running 50% below normal). In the investor's place is some kind of auto-pilot trading that is entirely based on currencies. Are we trading stocks...for Forex?

Outlook for Thursday

Regardless of why the market moves the way it does, we are still in a downtrend, as yesterday's rally was insufficient to break that direction. Unless we see something that confirms otherwise, assume that downside is favored for the next few days.

Your best bet is either "bear" ETFs, or quick bouncers, but in either case, keep your eye on the dollar as the market's crystal ball. (A ticker symbol you can monitor is UUP, which is the US Dollar ETF).

Sector Watch

Look for the Financial sector to be among the weakest groups (even though Financials spiked higher today), as more rumours of European financial troubles might be renewed. If nothing else, Financials had no real basis for today's rally, so look for profit-taking to yank them back to Tuesday's close---at best.

The strongest sector will most likely be Technology, as that group seems to be where most of the speculators are piling in. Commodities are likely to take another beating, especially if the dollar is stronger.

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