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November 15, 2006

Last Stand for the Dollar?

In today's session stocks continued their generally nauseating advance, being interrupted only minimally by the release of the Fed's October minutes which came across as marginally more hawkish than desired by advocates of free-flowing money. I'd like to say that stocks are looking tired at this juncture, but it is just too convenient for a bear like me to believe such a thing after experiencing the head fakes of the last few weeks.

Nevertheless, I remain on guard for a turning point because I also remain convinced that once the turning point is upon us, the selling will be rapid and brutal. There are too many players who think they will be able to get out the door first, and they will all certainly try. With the major indices surging into new ground, many bear hearts have been pierced. Perhaps these breakouts are the final head fake that deceives both camps. We shall see.

In the "insignificant" file for the day, Google fell a paltry 15c shy of trading at $500 for the first time, but the shares are still within spitting distance of the mark, and I have no doubt the bulls will try again. About a year ago, I wrote a widely-read piece in which I suggested that if a Google share managed to achieve price parity with an ounce of gold, the trade of the decade would be to go long history and short nouveau. In other words and paired trade of long gold and short Google. At the time GOOG traded for about 0.8 ounces of gold... the same price as today, though it dipped to nearly a half an ounce in the interim. I believe that the trade is still valid and would be a very profitable one. I'll check in on the performance of this hypothetical trade from time to time.

Speaking of gold, precious metals had a bit of a bumpy ride today. Gold traded in an $8 range, closing slightly lower, while silver wobbled 40c, closing slightly higher. Miners held fast through the volatility to sport gains for the day. I still sense a major move upward on the horizon, though whether that begins tomorrow or next month will depend on the action in the dollar...

...and the dollar is looking a bit pale in the face. As can be seen in the chart below, its 2006 rally line was broken a few days ago, and attempts to regain a footing have been futile.

stock charts

Today's action shows a bearish hammer and another close below the trend line. If the dollar weakens below 84.5, we may just have our trigger for the long-awaited unwinding.

Disclosure: None

 

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