"It's Money that Matters"
One of my favorite songs by Randy Newman, also the topic of the day, the US Dollar.
Here is a very busy chart, so let me dig into what all of this is. First of all the chart is that of the weekly dollar index, with the Black Line overlayed which is the closing price of the DJIA. I have green lines marking the very tight inverse relationship that has developed between these two markets. As you can see, they are trading in very tight correlation. Which is driving which is the subject of alot of debate and as per usual, I have a different view than most on this.
First of all, this inverse relationship is something that is not typical historically between these two markets. There has not really been a consistent relationship of cause and effect between these two markets. It is my feeling that the dog is the Dow and it is wagging the tail ( Dollar ). When I watch these markets next to each other, it is the DOW that moves first, which is then followed by an opposite move in the dollar index. I have never seen it be the Dollar first followed by a stock reaction, not one single time even on an intraday chart.
It is my belief that the reason this relationship currently exists is that really the only piece of good news in the world economically has been the stock market rally. When stocks are rallying everyone just generally feels a bit more optimistic. Individuals see their decimated retirement accounts increasing, and they become a bit more optimistic about the future. It allows a little more wiggle room for many bad things too happen.
One of the things the PPT has done over the last 10 years is to "arrange" for rallies in certain places that allow people to make some money while other things crumble around them. The Tech boom, the RE bubble, stock rallies etc. While inflating certain things artificially and doing this on a rotating basis, it has basically built the house of cards that fell last year.
Now we find ourselves in a quandry that the ammunition to inflate something else right now is being found in things that are obviously going to cause larger economic problems in the future. So, in the midst of all of this, a relationship between the dollar and stocks has developed that is more a sign of the times than really based in economic fundamentals. This could decouple at any time due to this, but it has persisted for awhile. Enter the PPT. They know that inflation risk is potentially out there yet we are in a deflationary spiral, so that risk for the moment is nominal at best. They can stimulate all they want without worrying about this. They have engineered this stock market rally and kept it up for awhile now which in turn has kept the dollar weak. However, if we do get a significant stock market decline, assuming this relationship stays intact, we are going to get a big dollar rally.
We are at the time of the year where seasonal peaks in many currencies have tended to occur, which is another supporting element for a dollar increase. The commercials have a fairly heavy long position in the dollar, but their buying which is the red line in the third graph was not able to stop the dollars decline earlier this year. I also look at GOLD as being a market setup for a huge decline as I have written about recently, which would also be bullish for the dollar. I think the stock market is making a significant top right here, again bullish for the dollar. We will know this week whether the stock decline last week is just a retracement, or the beginning of something bigger on the down side.
As a result, even though some direct dollar fundamentals are there for a rally and some are not, I have to lean to the long side of this market for the reasons just reviewed. It is hard to find anyone anywhere who is bullish the dollar other than a few traders who are some of the worlds best. That is the company I want to keep, not that of the armchair economists thinking that the dollar is going to get crushed.
I am a short term trader so I do not always trade in the same direction as the big picture views I have, I take what I see when I see it. I have made some money on the short side of the dollar recently even though I have been looking for a rally. As a result I still could do a short side trade in this market. However, for the big move, I think it will be up not down.
As I always say, I could be wrong and that is what stops are for.