2009

September 27, 2009 · Posted in Weekly Posts · Comment

US markets this week were largely influenced by a sudden dollar reversal but beneath the surface there may be something more important starting to emerge. The dollar rallied right after the Fed meeting. There was really nothing concrete in the meeting minutes that could have caused it but often when a market is in need of a correction any excuse can set it off and so it was with the dollar. As a consequence gold, silver, copper, oil, their producers, and anything else that had rallied on the back of a declining dollar dropped. Interestingly, most stocks that declined directly on the dollar did so to a much larger percentage than the dollar move. What remains to be seen now is whether this was a brief dollar correction cum short covering rally or something more.

Of note this week are the doubts that are starting to creep into the rally. It is unquestionable that here is huge liquidity out there through global government stimulus and it is also unquestionable that this is feeding into markets globally. What remains at issue is how much is actually feeding into the global economy and whether what is feeding in is sufficient to generate the growth needed to justify the market run we have seen.

Some key areas of concern are notable:

Copper and crude have been showing signs of weakness prior to this week. Both broke support this week. Copper stocks are rising in Shanghai and London to very high levels. Rumors of copper stockpiling by Chinese hog farmers raises the question of how much of first half Chinese imports were destined for production, how much for stock piling, and how much was simply for speculation.

The market expected US crude stocks to drop this week due to increasing demand - stocks rose instead.

The US durable goods orders for August were expected to show an increase, they declined by 2.4%.

The Baltic Dry Index is declining sharply reflecting a decline in commodity shipments to China and elsewhere. While some of this is due to increased capacity being added with ships ordered two and three years ago now arriving, there is a notable drop in the numbers of ships waiting to unload outside of Chinese ports.

All-in-all there is at best a pause in the first half expansion that we are starting to experience. At worst, we are seeing evidence of the economic underpinnings of this rally proving to be a illusion.

What about US markets? Valuations by some measures are now exceeding the valuations seen during the peak of the internet bubble. This can be justified only if we assume there is so much liquidity chasing stocks that valuations do not matter or are being reset to a new level. There is also an issue with the over three trillion dollars in assets in US money market funds that everyone is assuming is eventually headed towards stocks. It may be but with a declining US dollar there is no guarantee that it is headed for US markets. Think about that. US investors could move well over $3 trillion in assets into overseas markets just with a few clicks of the key board. That is the kind of thing that would characterize a true currency crisis - when the locals are selling.

So our message is, be alert to market reversals. It is likely we will see some rally this week in stocks and commodities but the risk is rising sharply. We think the chance of a further correction, taking stocks down 10 - 15% from their highs is likely in the next few weeks.

In our Members Only post, to be published later today, we will post a number of charts on specific stocks and ETFs that appear poised to break out and rally higher. These are our candidates for short term opportunities.

Charts shown below: USD, SPX, SSEC, Gold, WTIC, Copper

USD 09/25/2009

SPX 09/25/2009

SSEC 09/25/2009

Gold 09/25/2009

WTIC 09/25/2009

Copper 09/25/2009

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