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October 21, 2008

Project Basement

My parents are pack rats of the worst kind. For the last several days I have been helping clean out the basement of their house of 34 years which contained junk accumulated over the last 50. It is an enormous project and has generated a pile of items for goodwill large enough to independently qualify them for itemized deductions. Among the useless trinkets was a gift I received as a kid from a cousin who knew my interests. It is a clock in the form of a New York license plate. The tag number? WALL ST. I guess some things were just meant to be.

Well, stocks gave us neither scenario described in yesterday's post, After an opening gap lower, equities shot up to close the gap, but got nowhere close to the upper triangle bound before tanking. The market then repeated the cycle by rallying back to the day's high before tanking back to the low. It was the kind of session an astute day trader could use to buy that extra case of '88 Chateau Petrus. For my part, I remain sitting on my hands waiting for some kind of movement that will reveal the secret of the triangle. First, though, the SPX is going to have to decide which way to exit a more narrow congestion zone:

index chart

Credit spreads are tightening, lending more power to the bullish case. On the other hand, the dollar index continues its relentless climb. I'm not sure how much can really be read into dollar strength, however, since its rise is probably more a product of relative weakness in Europe than of dollar confidence. The euro constitutes over 40% of the DXY, after all.

In the meatime, the Fed continues to fuel the fire that will make all of us commodity traders multi-millionaires a few quarters down the road. Bernanke produced a new credit line of $540 billion to help money market funds avoid breaking the buck. These funds are presumably loans, but who knows what will be paid back? We must be well past the $2 trillion mark in newly minted money for the credit crisis. Deep recessionary effects are controlling prices via demand destruction... not to mentioned forced liquidation via the de-leveraging process... but when any type of global expansion begins, whether it be sparked from the East or the West, prices are going to explode higher. Although I'd like to milk the equity cycles for some extra cash, my main focus right now is capital preservation so that I can take full advantage of the next commodity bull cycle.


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