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July 20, 2009

Dollar Waves Goodbye

My schedule has not afforded me much time for posting recently, but I wanted to hammer out at least a late weekend post to get some thoughts in order. The break back above the 65DMA on the S&P 500 Monday gave us a strong warning that the bear case was in jeopardy, and the rest of the week manifested that signal to the upside. The accelerating volume seen during the week also tells us that the rally has not yet finished its work. I can see no other reason for a continued rally other than the malfeasances of the Fed and our government at work. The battle against delfation is being fought tooth and nail, and the only sure outcome of these actions is accelerated inflation. For this reason, I kept the Docfolio heavily weighted toward precious metals even while attempting to short the SPX. I now have no direct equity shorts, but rather have increased my metals exposure from where it was a week ago. Given developing circumstances, I am now expecting gold and silver to break higher sooner rather than later.

One reason for this expectation lies in the action of the dollar. A few weeks ago I noted that the nature of the bounce out of the early June low would tell us whether we would see inflation presently or down the road. A weak bounce would point to the former scenario. The dollar's action was less than weak... it was pathetic. I suspect we are about to see a wave 5 down move off the March peak, setting up a strong rally in commodities... especially monetary ones... and another lurch higher in stocks. Once this wave 5 move is complete, the dollar should unravel a more extended upside consolidation, and it is this period which will likely see a stronger move lower in equities.

 

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