| Gar's Market Blog
Outlook for Wednesday
( 17 February 2010 )
Stocks
Remain Hostage to US Dollar
Today,
I was rather puzzled why the
market was soaring to the moon,
since there wasn't any particular
news or catalyst that should
have sent stocks up like a flare.
At least not until I looked
at the intraday chart of the
US dollar vs. the S&P:
The
above chart shows today's action
of the dollar vs. the S&P-500.
Notice that they traded in nearly
perfect lockstep, but in reverse!
This phenomenon has been going
on for months, and is a testimony
of how much the market is off
its rocker.
Well,
perhaps off
its rocker
is an incorrect description.
A better phrase to describe
what is happening is that stock
traders and investors are not
participating in the action.
My sense is that the usual players
are not committing any money
to equities---which is evident
by extremely low volume overall.
Instead, the market is getting
jockeyed around by currency trading,
and probably by automatic "robot"
trading programs.
Hence,
ignore the pundits and the commentators.
You will hear countless "reasons"
for the rally---from earnings
to acquisitions---but the real
(and only) story is that a falling
dollar causes a rise in equities.
The
Reason
I
do not fully understand the
inverse relationship of the
dollar versus equities, but
it has something to do with
exports (or so I am told), and
also commodities. The idea
is that a cheaper dollar makes
more money overseas, or something
like that. Also, most commodities
are pegged to the dollar (dollar
goes down, oil goes up), and
the market is very heavily weighted
by energy stocks. But it
still doesn't explain two things.
One, why the market and the
dollar trade in absolute reverse
lockstep, tick by tick, and
two, why a falling dollar doesn't
hurt the underlying value of
equities overall. Eventually,
this relationship has to break,
because the dollar can't fall
forever without that killing
our economy. But exactly when
this silly relationship will
break is anyone's guess.
Outlook
for Wednesday
Friday's
forecast for Tuesday indicated
that the market was right on
the cusp of a trend. Meaning,
that strong upside will indicate
a change in trend---to the upside.
In this purely technical sense,
the trend has reversed and is
now established in the upward
direction. Even our flagship
product---StockVision---has
a very green Bear/Bull indicator
for near term.
Yet
again, it is all about the dollar.
If the dollar remains weak,
this trend will resume for tomorrow.
If the dollar recovers, look
for a snapping reversal, as
if today's rally meant nothing.
It
would be far, far easier to
forecast a market direction
if it weren't for the dollar
wild card. But we need to trade
what IS, not what we think it
ought to be.
Sector
Watch
If the
dollar remains weak, look for
Commodities to ramp even higher
than today. Should the dollar
regain some strength, then look
for Commodities to be the worst
performing group. Be keenly
aware of this dollar-hostage
situation to discover the strongest
and weakest plays.
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