Tuesday's Rally: Classic Bear Trap

Word that the BoJ was going to lower interest rates from 0.5% to 0.25% was enough to trigger a sharp reversal in the Yen. This correction completed the climax high for this move higher in the Yen. See the 1-year chart below.

The sharp drop in the Yen triggered a counter-trend move into stocks and out of bonds. Call it the anti-unwind of the carry trade, that is, a carry trade day. Yen and Dollar down, Euro and Aussie up. Emerging markets way up! Oddly, oil and gold quiet. A bearish tell?

As can be plainly seen by the charts, Tuesday's 10% rally is merely an up day in a down trend, and is a classic bear-market rally.

As my blog title says: Sell the Rally!

click to enlarge

Comments

[Dr. O:]

That 10% up day a week ago has been followed by flattish to up action in the market averages, in spite of some very bad news. With the benefit of hind site, last Tuesday was an intermediate term low.

However, earnings do not seem to support much of a move upward from here. My primary concern continues to be when to dump the US Dollar in favor of another currency.

With an Obama Presidency and the huge Federal Deficit, I foresee much higher interest rates and a much lower value of the dollar. That would, generally speaking, lead to higher commodity prices as well.

2008 Nov 04 06:03 AM