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October 1, 2009

Sea of Change

The start of a fresh quarter brought a sea of change to the financial markets. As suspected, yesterday's action was not reliable due to EOQ antics. The dollar's September 30th loss was quickly turned into an October 1st gain... and then some. Furthermore, while stocks failed to rally as the dollar dropped, they got smashed when it rebounded.

dollar index graph

s&p 500 daily chart

The long-awaited close above 77 on the dollar index occurred in conjunction with a crack of the trend line defining the entire rally out of March. The odds have swung enormously toward our preferred scenario of seeing a dollar counter-trend rally. This scenario should give equity bears a period of respite and also set us precious metals bulls up for a home run swing.

Interestingly, gold and silver did not cough up all their prior-session gains, solidifying our expectation of seeing them outperform equities during this consolidation period. I suspect the bias for PMs will be slightly downward while the DX chops its way up to the 200DMA. I do not have a downside target... wherever the price of silver stands when the DX hits its 200DMA will be the price at which the Docfolio will become laden with white metal.

My strategy for the current setup is to remain long precious metals and miners, but without leverage. I have also begun building a short book to both hedge my PM holdings and to position myself for an equity sell-off.

 

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