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November 24, 2006

No Appetite for Dollars

We interrupt this regularly scheduled vacation to bring you news of the dollar's demise.

Although I had planned for Monday's post to be my sole commentary this week, the action in the dollar during the two days surrounding Thanksgiving warrants comment. The 2% shellacking of our currency bodes poorly for the prospects for equities and may very well provide a catalyst for the serious selling anticipated by this author.

As I have noted on occasion, each turning point in the U.S. Dollar Index over the last two years has preceded a significant turning point for U.S. equities by several weeks. Ever since the dollar hit resistance in early October, it has slid continuously and now sits on the support levels provided in May. Today, its weakness spurred selling in equities on a day that is traditionally strong. Furthermore, the fact that a traditionally strong holiday week started off with big M&A news, yet failed to provide a rally, may be a telling sign of exhaustion. Traders will now have to sit nervously over the weekend to see how the shopping season kicks off and more importantly, how markets open on Monday.

The dollar's slide certainly brought some holiday cheer to holders of precious metals. Gold gained $10 while silver tacked on 40c, and mining shares enjoyed 2% gains. Those traders who continue to attempt shorts on the apparent head-and-shoulders pattern in the XAU continue to get burned.

My strategy is to sit tight with my metals positions, which include positions in both futures contracts and mining shares, and perhaps add to them selectively. I have recently increased by short exposure to equities, also via the futures market, and will selectively short individual equities as technical conditions permit. While I intend to hold the metals positions, the equity shorts may be unwound quickly if the market does not behave as anticipated.

Disclosure: None

 

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