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« Last Chance is Not Done | Main | Divergences Abound »

Tuesday, November 10, 2009

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forPPP

We are topping since May 2009! Were there 5, 6, 7 ... calls for major top since then? Well it's similar to pre 2008 time...

vipul garg

"The rally in the market has exactly nothing to do with the economy and the outlook for it. It is tied to one and only one thing - the decline in the dollar. "

and obviously then usd and its movement, has nothing to do with the economy.!

twitter.com/DrBubb

"Obviously then usd and its movement, has nothing to do with the economy.!"

Probably not- since a genuine strengthening economy, would be expected to lead to a stronger dollar.

Actually, the weak dollar, and rising stocks, have a common driver: very low US dollar interest rates, which are encouraging people in a dollar carry trade, borrowing it, to but all manner of cheap assets, including stocks.

cloudslicer

Looking at a 15 minute chart that shows after hours/pre market data it appears that the dollar is in the 5th wave down of minuet degree. Assuming this is not a B wave of a 4th wave down instead of a flat (it has made a new low) the minute wave should complete this morning.

Leone

If the overbought statement made by McHugh is referenced at the Macd level (as opposed to the spx being overbought) then he has no clue as to what he's talking about and shouldn't be listened to.
That said, he's likely to be right from the wrong reasons. A very common occurrence displayed by market participants

Bird

Denninger's piece is stunning. What undoes this incredible link? Only the unwind of the carry trades?Fed raising interest rates? Is that the only thing?

By implication, until the Fed does raises rates, can the rally even fail? The market can of course go higher, as the dollar falls based on lack of trust in the USA.

But it is a money maker just the way it is, for the carry traders. Their only worry is a melt up of the dollar when the unwind begins. Yes?

twitter.com/DrBubb

By implication, until the Fed does raises rates, can the rally even fail?

SURE, The market can begin to "collapse on its own weight", since valuations are stretched, and sentiment has reached an extreme on both stocks, and on the US dollar. In fact, as cloudslicer says, it looks as if the long-awaited turn (in the Dollar, and stocks too, I think) will happen today

It won't be the first time we have see a turn on a day when stocks trade, but bonds do not.

Mamma Boom Boom

>>I remember the bottom in Oct 10, 2002 (boy do I remember!<<

So do I. I held my breath and took the largest long position I'd ever taken in my life.

twitter.com/DrBubb

Marvellous !
Per The Stu:
Note that 10,334 is the point of a 50% retracement of the drop.

DJIA / HOD 10,340, as EUR breaks back down below $1.500

What do ya want, an exact 10,334 HOD?

Bird

Nathan, I still think there has to be an event drivien tipping point. But, if you are right, that the market can see the light as to the stretched valuations, then the dollar-stock market link will break down. For now, the linkage implies that the question is not if the valuations are high, it is whether the international investor can make more money elsewhere than in the carry trade. (Or that he gets scared out of his position.)

I now see more clearly a melt down scenario in the rush to exit the carry trade. But whether or not it is orderly, how the market unwinds this carry trade seems to be the thing to understand.

So my question to really smart guys here: must the unwind of this massive carry trade be ugly or are there soft landing scenarios? Japan is some guide, but their situation has been in the context of a much larger global/U.S. economy.

twitter.com/DrBubb

I think we have just seen an important low in the US dollar, and high in the Euro.

If the thrust continues, you are likely to see selling accelerate in stocks.

I have spent several hours constructing a thread to help my fellow GEI friends track the emerging downwards move in the Euro : http://tinyurl.com/EuroFall

Jay

IMHO, we are just completing the C wave of a 4th wave flat on the Euro, which everyone will mistake for a the first wave down. We should base in the 1.47 area for one final push up in a 5th wave of C that should take us into the 1.53-1.55 area. This will likely coincide with what looks to be the start of the 3rd and final zigzag on the SP500 towards the 61.8% retracement at 1236.

Michael

Wow, Denninger finally highlights the link between the weak dollar and the equity market? Where has this guy been all these months?

It's clear that this guy doesn't trade the market for a living . . . because if he did he would have noticed this link many months ago. Anyone that has ever traded an energy stock, a coal stock, a driller, a miner, or nat-gas stock has been ON TOP OF THIS CORRELATION for months and making a lot of money while Prechter and his "perma-bears" have been calling for the start of P3.

Interestingly enough, Denninger makes no mention of the FACT that the US Dollar lost 40% of its value while Bush was in office for 8 years . . . nor does he have a problem comparing the US situation to Japan's anemic recovery and "Lost Decade".

Denninger implies that the US consumer will be hurt from inflation resulting from the collapsing dollar, but has no problem highlighting Japan as a perfect analogy even though their economic recovery was "choked" off by serious structural flaws, not too mention grave policy mistakes.

I would strongly suggest that structural flaws were not the villain in the United States. It was policy mistakes. Pure and simple. Policy mistakes that could be fixed, and fixed much quicker than in Japan.

The American policy response has been much quicker than Japan's crisis, in that it took Japan nearly NINE YEARS to reduce the overnight interest rate from a peak of 8% to zero. In the United States, (beginning in August 2007) this only took about 16 months, from 5.25% to zero.

The American policy response in bailing out large banks and financial institutions was also leap years quicker than what occurred in Japan. In fact, the BOJ and Japanese government literally let their banking institutions twist in the wind for years!

While bloggers like Denninger love to use Japan and their real estate, asset "Bubble" bursting as a parallel to what the United States is going through . . . his analysis conveniently ignores major structural differences and policy responses that clearly argue to the contrary.


vipul garg

"Anyone that has ever traded an energy stock, a coal stock, a driller, a miner, or nat-gas stock has been ON TOP OF THIS CORRELATION for months "

can you expand on the correlations here

Don't Know Squat

I think stocks are about the top and the dollar is about to bottom and blah blah blah Denninger blah blah Precther blah blah Massive Unwinding blah blah blah

Mamma Boom Boom

vipul garg, isn't Michael a treat. I think of him as 'used dog food'. A 5' 2", east coast, vinyl siding salesman.

Tom

About the only thing bullish for the dollar and bearish for gold is silver's failure to come near its high, even its high of a the past two years.

And Michael is a treat. He may disagree with you, Ned, but you do us and yourself a disservice by stooping to ad hominem attacks. You are better than that. I've enjoyed your market commentary very much.

vipul garg

ned,
i am game to listen in the right spirit to anyone who is willing to share.
he has made a statement. i dont quite understand how to correlate all thses with equity.may be he can logically explain.

Michael

Vipul,

Feel free to CLARIFY what it is that you wish to ask about commodity related equities and their inverse relationship to the Dollar. The correlation between weaker dollar and higher commodity prices has been a strong one for decades. This year, that correlation did not waver as China looked to diversify away from US Dollar denominated assets.
What is it exactly that you wish to know or ask?

vipul garg

Michael,
you mentioned
'an energy stock, a coal stock, a driller, a miner, or nat-gas stock '
how are these related to the broader equity indices specifically spx.?are there statistically significant studies to show over periods of time , that the relation holds.?
is there an order in which you see their strength and spx.?
what does their convergence and divergence convey?

i am not really interested in equity and usd relation.

Michael

FYI:

The most recent commitment of Traders (COT) report from November 3rd shows that the only areas where speculators (non-commericals) are net short are in Treasuries and in the U.S. Dollar.

The net short position by specs in the 10-year Treasury on the CBOT is 85,551 contracts. On the CME, there are 24,389 net speculative long CAD positions, 50,264 net speculative long contracts on the Aussie Dollar, and 28,036 net longs on the Euro contract.

The largest speculative longs are in the commodity sector, which can be construed as short-term bearish. A record 271,564 long contracts on Gold on the COMEX, and 44,312 net longs on silver which is near a record.

Michael

Vipul,

Just as you are not really interested in equity and USD correlation, I really have no use for how the energy, mining, and commodity names are correlated with the SPX given that I am a short-term trader that solely concentrates on trading these sectors and their big BETA names by themselves - - - and not in a broader portfolio that encompasses a variety of sectors within the S&P.

That having been said, I think that it is pretty clear statistically that the energy sector in the 1990's was in a secular bear market and spent most of its time underperforming the S&P 500 as its 12-month relative performance spent most of its time in negative territory. That all changed in 2000 when energy took leadership from the technology sector and began to outperform the S&P 500. Since 2000, any time the energy sectors' 12-month relative performance reaches north of 20% a period of underperformance results as the sector cools off from a signficant run and investors ROTATE into other sectors.

Typically, the energy sector begins to outperform the S&P 500 when its 12-month relative performance returns to neutral (0%) to slightly negative in the -5% to -10% range. Right now the sector has underperformed the S&P 500 by 6.5% over the last twelve months (ending August) and the recent rally in energy shares may be signaling a turn in the sector’s relative performance.

As a side note, I think that it is most productive to trade only ONE SECTOR of the market and trade it well. Trying to call tops and bottoms in the S&P may make for all sorts of ego-massaging "headlines" on blogs and in the mainstream media, but the real serious money and outperformance comes from focusing in on ONE SECTOR and understanding that sector to the best of your ability.

If you need more specific info on various sector correlations with the SPX, I would suggest that you contact your Private Client broker at Goldman Sachs, Morgan Stanley, UBS, etc. Their quantitative portfolio strategists and equity research departments track these sector outperformance/underperformance correlations on a weekly, monthly, and quarterly basis.

Hope this helps.


Bird

Michael (or Duncan), the correlation between the dollar and dollar based assets has been on-going for years, as you point out. I don't know, perhaps you do, whether this correlation has been as precise as it now appears to be between stocks and the dollar. But now, since the Fed has reduced rates to 0%, some are saying that it's all about one massive carry trade that has to eventually unwind (implode). That's different. Is there a massive carry trade, viz., is the implication of the correlation different now than it was a few years ago? A carry trade is a hedged position. The correlation could exist just because dollar denominated assets are, er...denominated in dollars. Please comment.

joe

Nice work Nathan! I can see you put a lot of time and energy into that.

Joe

DG

Bird,

No. Correlations are not static, although they tend to vary by specific amounts and variation outside of those amounts is itself significant.

One of the reasons risk management and asset diversification theory "failed" last year is that correlations increased "in the tail", i.e. as "systemic risk" (as good a term as any to use in this context) increased, so did correlations between asset classes.

yelnick

Bird, the correlation is a signature of a credit bubble. Back to around 2004 one could see a linkage between the USD and all other markets denominated in Dollars. EWI used to call this All The Same Market. The same linkage was less clear during the tech bubble (96-00). The foundation of modern portfolio theory - diversification - began to fail in 2005. There was no place to diversify (among Dollar assets) since they were al linked tot he fall or rise in the Dollar. And could one run to China? The RMB was linked to the Dollar too.

What seems to have changed recently is the how tight the linkage has become; back then it was evident but not as precise. Since the monetary stimulus is global, the tight linkage might be due to that more than a specific Dollar Carry Trade. Perhaps someone else can discuss the delta between the carry trade in the USD and the global monetary stimulus. I have been commenting for a while how it makes sense to hedge the Dollar by buying into Dollar assets such as the Dow; but the carry trade would be more shorting or borrowing in USD to buy into assets in other currencies.

joe

I do believe today was actually an important day - or will be seen so shortly. Shorts that used stops around the 10/21 high had them taken out early. There was no follow thru after that. SO, many that were short were knocked out today. It had little volume, range was pretty tight - and in total - if you think specialist theory makes some sense, this is what you might expect.

The 50% fib was hit early today - and frankly, the Dow has a big gap at about 10050 that I think, at a minimum, is likely to get hit shortly.

Besides, the dollar held up today - even into this tepid rally.

I hit the trigger about 12:10 - and I bet a few of you guys did too.

Joe

Bird

thanks michael, yelnick

Bird

oops--

thanks DG, Yelnick

twitter.com/DrBubb

"the correlation between the dollar and dollar based assets has been on-going for years"

There are only two asset classes anymore: The Dollar, and the Non-Dollar

The US has flooded the world with so much liquidity that they are driving every market, since the Dollar has been so easy to borrow for any sort of carry trade investmeny

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