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May 8, 2009

Panic Attack

The dollar suffered a panic attack in Friday's session, dropping a huge 1.5%. Interestingly, precious metals failed to rally and stocks failed to significantly better Thursday's high. Given these divergences, I'm currently viewing the action in the buck as a capitulation. I expect this panic to mark the end of the dollar's current move lower and the end of this incessant equity rally.

dollar chart

A couple days ago I cycnically described how I doubted the dollar would make it easy for bottom callers. What technician wants to go long the buck after it closes below two important support levels? Of course, we still need the reversal. I could be blowing hot air here, but there are a few factors which make me believe the odds favor a turning point. As noted above, precious metals failed to confirm the dollar's drop as both metals were more or less flat. Futhermore, the S&P 500 did not take out yesterday's high in any significant way (it beat it by less than a point), though it did manage to close above the ascending trend line.

spx chart

With volume acceleration showing up, we're near the end of this move time-wise, but keep in mind that parabolic moves... a shape this rally has taken since mid-April... can cover a lot of ground in their waning days. A quick spike to SPX 1000 followed by a rapid failure would not be out of the question. Frustrating, nerve-rattling, and cardiovascularly-threatening, but not impossible.

For its part in leadership, the NDX is saying such a move won't happen:

ndx chart

The NDX is definitely lagging here, so I took off some of my SPX short position and added a lower-dollar NDX short. The reduction in dollar exposure is designed is simply a reaction to the higher beta of the NDX and not as an effort to reduce exposure.

There are a few other signs that we may have reached a turning point:

banking stocks

retail stocks

transportation stocks

These three industries are central to our economy, and the stocks behind each are showing signs of extended moves and exhaustion. I certainly would not want to be long in this environment. I think this rally is giving shareholders a final chance to liquidate and save cash for weathering a much larger storm looming in coming quarters.

Now that I've rattled out my weekend post, I'm going to go do what any rational person who has yet to pack for an overseas trip departing tomorrow would do: go out and have a couple beers. As usual, I will be toting my laptop, and if I can get wireless access in Aqaba, I will slip a couple posts out next week.


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