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May 20, 2008

A Day of Clarity

Scratch that dollar rally. The buck did not break out as I fretted in yesterday's post. Instead, the dollar index broke 1% lower. Fortunately, precious metals broke strongly higher with silver up nearly 5% and gold up nearly 2%! The fact that the dollar could not approach its 200 DMA during this countertrend rally is very encouraging for the prospects of an extended rally in precious metals, though quite disturbing for the prospects of American power. But I'll defer on the politcal discussion for the moment.

Equities also broke today... lower. As of this writing, the SPX has coughed up 2% from yesterday's high, while the NDX is off nearly 3%. It would not be surprising to see further weakness in days ahead. Today's action confirmed yesterday's bearish candle:

stock chart

However, I expect the greater rally I discussed a couple weeks ago to continue to develop. I still firmly believe that equities will work their way to all-time highs by this year's elections and that by the beginning of 2009, we will dive into a nasty bear market that shames the 00-02 period. That said, the put/call ratio is approaching the lower bound of its recent range:

stock chart

This ratio should instill caution into the minds of those who are aggressively long. However, I emphasize recent because we are still above what would be considered normal for this ratio in the longer-term. For example, the 2000-2002 bear began with this ratio at 0.45! Perhaps this ratio will surprise to the downside before the market rolls over in earnest again.

And just because its fun to look at charts when things are going your way, here is a gratuitous graph of silver.

silver chart


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