“Tricks are for kids he plays much gigs
He’s a big bad wolf and you’re the three pigs
He’s a big bad wolf in your neighborhood
Not bad meaning bad but bad meaning good“
“Peter Piper” – Run D.M.C., 1986 from the album “Raising Hell”
What was once bad is now good. Or maybe what was once good is now bad. The story for months has been that a weak dollar is good because it supports exports and economic growth. Nevermind the risks that the decline could go from orderly to disorderly or that all our trading partners also want weaker currencies. The increase in asset prices has been a convenient and welcome residual. Until this month, good economic news has generally led to more selling in the dollar. This past week has confirmed that this inverse correlation could be unraveling. Many traders are taking note. Even “Mr. Commodities” Jim Rogers has placed a short-term bullish trade on the dollar.
Back in June, as now, the stock market churned as the dollar gained strength. The big difference now is that there is bona fide good economic news to go along with the dollar’s rise, AND the dollar is breaking out of its recent downtrend as marked by the 50DMA (see yesterday’s chart below):
I do not think the trend in the economic news or the dollar will be sustained. Also note that the euro is the majority of the dollar index at 58%. The euro is buckling against all the major currencies by growing sovereign debt issues in Greece, Spain, Ukraine, and Portugal, and this is lending a LOT of support to the dollar. If these problems turn around soon (the Greek Prime Minister is insisting that Greece, an EU country, is good for the money), the dollar could sell off quite rapidly as risk appetites rally again. The Dubai debacle is a great reminder of what can happen once the market stops caring about the latest crisis.
The dollar’s rally is also shaking out a lot of the momentum players who bought gold only after it finally firmed up above the psychologically important $1000 level. I have duly noted the almost rabid skepticism regarding gold on this latest run in price. It is almost the same skepticism that gets louder on a near periodic basis year-after-year. I finally understand how all the stock market bulls feel when they claim they are taking the contrary position as the stock market stubbornly creeps ever higher. This shake-out process should create some fresh, uh, golden buying opportunities over the longer-term. Although I fully agree with Rogers that it is time now to buy more silver than gold. (Chart of GLD below is from mid-day today.)
*All charts created using TeleChart:
So, while the “bad-dollar, good-market” story is put on hold, the “good-dollar, bad-commodities” story is creating the current buzz. I imagine we will even start to hear more and more pundits claim that now a good dollar is GOOD for the stock market (whatever story works!).
Again, next week’s Federal Reserve meeting is the next big wildcard. I still think growing expectations for a more hawkish Fed will be greatly disappointed.
Be careful out there!
Full disclosure: long GLD, long SLV, long SSO puts (and wish I had not sold my latest TBT position two days ago!)