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November 30, 2006

Dollar Dogged

Metals prices exploded today in response to more heavy selling in the dollar, which fell another half percent as measured by the Dollar Index. Gold gained 12 bucks and silver popped a healthy 40c, sending shares of miners soaring. We are now facing a veritable panic in the dollar, and unless we witness some sort of sharp rebound or at least a stemming of the tide, I do not see how equities hold up much longer.

Stocks began and ended the day with breaks to the downside, but suffered a rally in the middle, so the net result was flat. Bears have to be heartened by the sharp weakness seen in the last half hour. I imagine that end-of-month window dressing held things together today, and we now have a nice head fake rally in place with bearish divergences on the intraday charts.

stock charts

If the scenario I have been discussing this week is valid, we should see renewed weakness very soon.

Adding to the bad news for stocks and Goldilocks economy buffs, November retail sales came in weak across the board, and holiday sales expectations were revised lower. Especially hard-hit were Wal-Mart, Nordstrom, American Eagle Outfitters, Kohls, and J.C. Penney. My shorts on this group are not as extensive as I would like, but I intend to add into this weakness. I do not think the news will improve in this sector.

Interestingly, prices of home builder shares exploded higher today. The SPDR Homebuilder ETF was 4% higher, lead by gains in Toll Brothers, Centex, KB Home, and others. Given that these gains are occurring at a time when the deterioration of housing is becoming obvious even to those who doubted there would be a serious downturn, a professional trader would have to believe we are witnessing exhaustion of the rally in the homeys that began this summer. However, it is difficult to tell the difference between an exhaustion gap and a continuation gap until a reversal is in place, so as far as I'm concerned, all bets are still off on this group.

Disclosure: Long AEOS Puts


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