Today's biggest contrarian bet - the US dollar
By
Dominic Frisby Aug 10, 2009
Print this article
I must admit to being confounded. The strength being shown by both stocks and commodities has me scratching my head. 'Sell in May' has not worked this year.
The vast deflationary contraction of credit that was striking the world barely six months ago seems to have been superceded by an inflationary force of inexorable upwards momentum.
Perhaps, at least as far as global stock markets are concerned, the reflationary efforts of central bankers have, despite all the sniping from people like me, worked.
Or, perhaps not. Perhaps markets are set to turn...
The dollar is breaking down
For now, as far as I am concerned, it's all about the US dollar.
The greenback has quickly gone from being one of the most desirable assets around to one of the most reviled. Suddenly the world and his wife would rather own anything: equities, oil, copper, corporate bonds – even houses in the UK, or, worse still, sterling – but not US dollars.
Indeed, thanks to central bank policy, there is little incentive to own them. They offer a paltry interest rate and are being printed into oblivion. People are being almost forced to speculate. And, right now, the dollar is breaking down.
But in my view there is just too much bearish sentiment. I overheard on Bloomberg last week that just 3% were bullish on the dollar. 3%! Too many people are betting on the dollar's downfall, in my view. Markets have a habit of slapping the majority in the face with a metaphorical large fish.
The dollar remains the senior global currency. Is it right to be so unanimously bearish about the senior global currency? It is suddenly the contrarian of all bets. Yet we saw last year, in times of panic, it is the first asset that people will rush to.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
But we have now broken support at about 78.5 on the dollar index. If this level just below 78 does not hold, the next line of support is at 76, and after that the old lows around 72. But in my view there is a good chance we could find a bottom around these levels. In fact, Friday's rally , even as stocks rose, suggests the bottom may already be here.
And if the dollar rises, woe betide everything else. A bottom in the dollar implies a top in stock and commodities markets. Those who use Fibonacci numbers (this is basically a charting technique that uses a specific set of ratios that recur widely in nature as reference points) will note that just above 1,014 on the S&P is the 38.2% retracement of the entire move from the highs above 1,576 to the March low at, ominously, 666. Friday's high was 1,017. Technically, it's an ideal place for a rally to peter out.
Here's another little stat for you. The bear market rally from the crash lows of 1929 to its top in April 1930 lasted 22 weeks. This rally from the lows of March 8th to date has lasted, you guessed it, 22 weeks.
Are stocks heading for a fall?
Now please cast your eye over the next two charts. The first – for which I thank Dimitri Speck of Seasonal Charts – shows the seasonal pattern of the Dow in every post-election year from 1897 to 2005. It reveals a clear rally into August, followed by falls into early November. I wish had seen this chart back in May.
Now look at the chart for the Dow this year.
The falls into March were a little more extreme this time round, but there were falls nonetheless; the rally from March to August, with a June correction en route, has played out to the script. Will the next few months be just the same?
Given the hefty momentum that has carried us to these highs, it is unlikely that we will turn straight around and collapse. Markets will need at least a few days to make up their minds. But I would not be a buyer here – except of bear funds.
Our recommended article for today
Theo Casey explains why you should ignore bullish investment analysts and stick with defensive stocks - and picks three to buy now.
Published in
Investments
| More
articles
by
Dominic Frisby
Related articles
-
By David Stevenson, Nov 13, 2009
-
By David Stevenson, Nov 09, 2009
-
By David Stevenson, Oct 29, 2009
-
By John Stepek, Oct 28, 2009
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
