Has the Dollar Hit a Major Bottom?

Many pundits are saying that the dollar is ready to crash and burn, signaling a time of mounting inflation. But some reputable sources disagree. Robert Prechter, president of Elliott Wave International, is calling for a long-term rally in the U.S. dollar. He's entitled to his opinion, but his track record gets my attention.

Prechter, famous for such important calls as the 1987 crash, the 2007 top in stocks, and the 2008 peak in oil prices, says he sees significant evidence the dollar has put in a major bottom and should rally for the next year or two, bringing down most other asset classes in the process. He thinks that the biggest risk to the economy is deflation, not inflation.

Prechter has been wrong before. I remember reading one of his books in 2003 in which he seemed to be calling for an imminent crash in the U.S. stock market and another Great Depression. Stocks soared from April 2003 through July 2007.

Many analysts and mainstream news sources attribute the recent uptick in the dollar versus other major currencies to an improving economy signaled by last Friday's "stronger-than-expected U.S. jobs numbers."

"The dollar index is coming off a deeply oversold condition and bounced off the bottom of the Bollinger Bands," said Andrew Bekoff, chief investment strategist at Family Office Group in New York. "We have seen that rally take us back to the 20-day moving average at 78.79."

Prechter, who is famous for being a contrarian, says the U.S. dollar has put in a major bottom but not for the reasons everyone else is pointing to. Prechter points to three factors:

• The Elliott Wave Pattern: Without getting too technical (for your sake and mine) Elliott Wave Theory looks at markets cycles in terms of wave structures that come in five parts. Five waves up followed by five waves down. Well, according to Prechter's research the pattern confirms we recently hit the fifth wave down. Next stop: up.
• Sentiment has reached an extreme: "The Dollar Sentiment Index for the Dollar Index reports just 3% bulls among traders, an extreme level only five times in the past 20 years, usually near an important low," Prechter wrote on Aug. 5. "The last time we saw readings like this was March-July 2008, just before the dollar soared." In other words, the "short the dollar" trade is overly crowded.
• The biggest risk to the economy is deflation not inflation: As he lays out in his book, Conquer the Crash, Prechter thinks the bursting of the latest bubble will lead to a major economic depression.

Read full article…and listen to the interview from Yahoo! Finance Tech Ticker. Prechter sees an immediate threat to the credit markets and debt instruments. If gold has decoupled from the dollar, it might not negatively be impacted by the dollar's rally.

But as we saw last summer and fall, sometimes everything but the dollar and US treasuries can collapse in price. That's why I decided to hedge by buying some Vanguard Extended Duration Treasury ETF (EDV).

The implications for the stock market, the credit markets and many commodities are negative according to Prechter. He's calling for a "major implosion" in the current credit structure.

The Dollar Sentiment Index for the U.S. Dollar reports just 3% of traders are bullish on the dollar, which is a powerful contrarian signal. According to many experts this is an extreme low in bullish sentiment seen only 5 times in the past 20 years, and has often been the harbinger of the dollar moving dramatically higher against other currencies.

Will this cause the long-awaited correction in GLD, SLV, CEF, and IAU? Are investors getting closer to a time when it makes sense to take some stock market profits off the table and begin nibbling at SKF, SBB, DOG, DUG and DZZ?

All the above are ETFs are investors should familiarize themselves with them. Remember this about a potential rally in the dollar: It doesn't mean it necessitates an immediate end to the stock market rally.

Companies like General Electric (GE), Alcoa (AA), DuPont (DD) and NYSE Euronext (NYX) might, and I mean "might", have a ways to run yet before stocks next their next dramatic plunge.

Disclosure: I own GLD, SLV, CEF, EDV, AA, and NYX.

Comments

[Dave Wrixon:]

"The Dollar Sentiment Index for the U.S. Dollar reports just 3% of traders are bullish on the dollar, which is a powerful contrarian signal. According to many experts this is an extreme low in bullish sentiment seen only 5 times in the past 20 years, and has often been the harbinger of the dollar moving dramatically higher against other currencies."

Don't buy this argument. Once in a while the crowd are actually right. The reason we are not reaching an normal market bottom is because the Fed and the Treasury have been working to support the Dollar probably with a good bit of assistance from major Wall Street Banks. The problem is that they cannot possibly hold the line without plunging the US Economy into the Abyss due to the higher interest rates that are going to be required to support the currency. Moreover the US needs a much better trade performance to support the domestic economy. This cannot be done with the dollar at current levels.

The question in my mind is whether they will switch to an orderly but accelerated devaluation or whether they will just cave in? The only hope of holding the dollar in the current range is if they can bring China back on board as a major inward investor. However, this is impossible because, not only is China highly sceptical of the security of its US investments, but is now having to look inward and focus on the development of its own internal economy, which means it just won't have the spare cash that Obama so desperately needs.

Aug 17 07:45 AM

[SW Richmond:]

The dollar WAS ready to crash. QE, and the promise of Fed intervention, was the only thing driving up stocks and holding up asset values. The timely ending of QE (September) ends the risk trade; asset values will suffer in order to save the Treasury market. It is a deliberate act. No one need consult any mystical charts to see the next leg down in stocks.

Aug 17 07:48 AM

[basehitz:]

I saw 3 Prechter interviews recently. His concepts are intriguing, but I draw my conclusions by other basis.

On my live trading screen, I track charts of USD TBT SPY USO, then a bunch of other tickers and other sub-groups. But those 4 show me that, just like last year, when SPY sells off, traders move into USD and US Treasuries. Commodities then sell off in response to USD strength. Recently, CNBC’s Liesman tried to argue USD inverse to SPY had broken. Bull! Watch it yourself live and it’s obvious.

Some argue it’s a wave model, or technical, or fundamentals. Whatever. What I see is robotic trading to hold the above relationship still intact. I maintain that when the market corrects, commodities will follow as traders seek refuge in USD and UST.

My concern with the market is less about wave theory, and more about overleveraged consumers. Bulls are bringing out the same argument of typical cyclical plays in a consumer driven economy. Trader Mark challenged JPM’s argument today using the old playbook, and dismisses the “new normal”. I disagree with JPM. . . strongly. Consumers have spent too much for too long and now have a mountain of debt with shrunken asset values and weak job prospects. Whether that follows a wave theory, I’ll let someone smarter figure that out.

BTW, Lowe’s just posted results and the forecast. Crappy on all points. It was down 12% premarket. More to follow IMO. Welcome to the “new normal”. Consumers have shot the wad. It will take years to repair the damaged balance sheets.

Aug 17 08:01 AM

[chap08:]

Like most commentators, Prechter gets 50% wrong and only talks about the ones he got right.

As for the dollar, I can't tell you what it will do in the short term (no one can), but in the long term:

- It is overvalued against asian currencies. They keep paying the price to keep the dollar up. This can't last for ever.

- It is overvalued against gold. We'll be printing a hell of a lot more greenbacks but they wont be making too much more gold.

Aug 17 08:13 AM

[Newend:]

Elliot wave theory? Perhaps Saturn Rising in Libra should be given the same predictive weight. If chart reading were accurate, people would be a lot richer.

Inflation is the big worry. We have obviously taken the disastrous route of trying to print our way out of economic pain. That will have one incontrovertible consequence.

Aug 17 08:18 AM

[Francis Sch...:]

Excellent! You just nailed it. The problem with many analysts and investors is that they are impatient and trade a lot.


On Aug 17 08:13 AM chap08 wrote:

> Like most commentators, Prechter gets 50% wrong and only talks about
> the ones he got right.
>
> As for the dollar, I can't tell you what it will do in the short
> term (no one can), but in the long term:
>
> - It is overvalued against asian currencies. They keep paying the
> price to keep the dollar up. This can't last for ever.
>
> - It is overvalued against gold. We'll be printing a hell of a lot
> more greenbacks but they wont be making too much more gold.

Aug 17 08:46 AM

[Old Trader:]

Of all the various iterations of TA, I'm the least swayed by Elliot Wave Analysis. While there well may be something to it, it seems its practioners are always getting their wave count wrong.

Aug 17 09:09 AM

[connorport:]

The only thing that would make this conclusion happen the way its predicted is if heavy stimulus in China and Europe keeps their values down as well. I think this will happen as they scramble to become the next worlds middle class.

Aug 17 10:44 AM

[Mark123:]

Every time I talk to an Elliot Wave believer, the result is the same... When they predict correctly, I hear "See, I told you" & when they predict incorrectly, I hear some bogus Elliot theory excuse like an "extended wave" and a new prediction. Elliot wave is 50/50, much like guessing.

Aug 17 11:00 AM

[Marc Courtenay:]

You all share many of my own concerns and doubts about the Elliot Wave Theory and Prechter's work. Like we're seeing this morning, the exchange specialists and insiders know how to "focus the news" to cause whatever they want to either go down or rally, so they can either accumulate positions at low prices, sell high, short whatever is overpriced, and drive whatever much lower so they can buy-to-cover those short positions and again begin building up their positions at low, bargain-basement prices. Once we can recognize how and when "they" are doing this, we can ride their coattails to some very profitable results.

Aug 17 12:07 PM

[mouse85:]

Prechter is not wrong all the time, just early. The peaple that bash him are short term thinkers, similar to the Buffet bashers.

Aug 17 02:01 PM

[specks:]

For my money, I would prefer someone who admits they are wrong. If I can be right 50% of the time I'm in the 'Hall of Fame' and then some!!
I've found Prechter to be a good resource.

Aug 17 02:42 PM

[searcher:]

"...not wrong all the time, just early." Or late. How early is too early? When its just after too late? I really prefer the stability and personal insulation provided by the 'stopped clockers'; be they permabulls or permabears.

Aug 17 02:44 PM

[whidbey:]

In a word, "no" (bottom) in the dollar. Think what that means if it is true. Capital arrives in boat loads, Congress has been declared incompetent and sent away, and gold has to find a new rationale. It is very unlikely thank heavens.

As for you catching the market and buying in - that is a pipe dream. Pick the strategic sectors you see and build small starting positions to monitor, look at dividend performers as well, and think about bonds, cash and PM as anchors. No one strategy always works over time, but diversification into promising sectors has a high probability of working. If this works out for you we will tax hell out the proceeds when you think you are safely retired. ( Safe retirement is another myth for another day.)

Aug 17 04:38 PM

[Gigem77:]

Prechter was bearish on stocks through the 90's, ouch! He was wrong about gold in 2001, 2002 and 2003 and still is. He was wrong about interest rates in 2004, clinging to the notion that falling stock prices would cause higher rates when in fact just the opposite happens. Is it so hard to imagine that he is wrong now about the dollar and deflation?

Aug 17 09:00 PM

[vonschumann10:]

I use price and volume readings like Tom O'Brien, and from that standpoint it is quite clear that the dollar is in for a rally of some substance, but I have to disagree with the third premise of Prechter's argument: inflation is the real problem, not deflation, and one need only be able to read a money supply graph and understand the Fed's viewpoint and economic philosophy to grasp that. It is very clear, though, that any sustained rally in the dollar will hammer equities. That correlation, as someone said above, has been evident for a long time now, and it's really almost 100% accurate allowing for a few days divergence here and there. The volume of buying that's come into the dollar off its recent bottom has been very bullish. However, while the price action in gold and silver has indeed responded, the volume really doesn't match up. GLD especially has come down on pathetic volume into support levels. It'll be interesting to see how that pans out, but if I had to grasp at straws I'd say that means that not many who own GLD really believe the dollar rally to be sustainable. Regardless, I think a reverse H+S pattern can be seen in the UUP/dollar index and a normal bearish HS pattern in GLD, SLV, and who knows, we might have just made the head of a monstrous H+S pattern in the SPY and DIA. Does that mean the March lows are in store? I have no idea. It all hinges on the action in the dollar.

Aug 18 01:27 AM

[Moon Kil Woong:]

The Fed must do something about it's increasingly alarming rise in yields in mid term dated Treasuries and fast. That means less or no QE dole for a while letting them and the US government know they must curb spending. Thank goodness for some market rationality. It seems like the only way to keep the Fed from ruining the entire US economy and destroying the dollar is to refuse to buy US Treasury bonds.

After all, a Federal Reserve that can't even operate Treasury Auctions has no rights or credibility whatsoever. Thus, their abolishment seems all to rational a response to make them feel comfortable.

Aug 18 01:59 AM

[Maxe Paul:]

You only have to read the comments here to know a bottom is due.

It appears nearly everyone is short dollar, long gold, i expect a massive turn next month.

Aug 20 10:35 AM

[whatishappe...:]

Another well admired trader - Nadeem Walayat supports the same view that the US dollar is due for a rally. The implications for Gold are obvious if this takes place. Upwards resistance for the US dollar index could reach 90 or higher. But is this a brief rally until the dollar realizes it's true value, and inflation takes a hold on it? Many economists support the argument that the gold price will break the $1000 mark and head higher.

Aug 22 08:15 AM

[kaskoosek:]

www.itulip.com/forums/...

Aug 26 06:35 AM

[C.S. Jefferson:]

People that think the dollar will continue to decline seem not to appreciate that all currencies trade relative to one another, such that in our global economy it's not inflationary risk that's on the table--it's "deflationary risk."

It's the focus on assets and the ability to leverage off assets to create liquidity that is more meaningful.

Look at the USD/AUD (Australian Dollars) relationship. Clearly, the recover over the last six months in the Aussie is related to being a heavily commodity driven export economy to, namely, the country of China.

To speculate that there will be a currency crisis in the USD is to argue that the global stimulus, monetary easing and US/CHINA import/export relationship will falter. If so, then perhaps it would be better to "short the Aussie against the dollar", or Short AUD/Long USD.

The commodity story--all USD denominated--is the one to watch closely to show the strength of this market recovery or not! And if our economy stalls out again then, surely, so will China and commodities would crash like in 2008...

If you believe gold is going to $2,000-3,000 per troy ounce, you shouldn't buy gold, you should buy guns, ammunition, dry bulk food, and water...

Sep 03 01:40 AM

[Gigem77:]

Since this article was written on 17-August the dollar has tanked from over 79 to a new yearly low of 76.46. Gold has risen from 930 to 1011. Silver ran from 14 to 17. The S&P 500 has risen from 975 to 1048. Prechter is wrong again. Everybody who took his advice and bought the dollar, shorted gold and shorted stocks, has lost money.

Sep 12 09:03 PM

[globalview99:]

It looks like a roll over is starting; as stated by someone above, Prechter was just early as are most market prognosticators. Timing, given all the variables, is probably the hardest thing to get. yeah, he was forecasting this bear market from 2003; not five years too early, but the Bush Administration and Greenspan kept propping up the economy with easy money. The easy money then imploded eventually which was the first wave down. Obama and Bernanke responded with infusions of megamoney to reflate the collapsed financial and real economy. Eventually, there will be a collapse of the recovery under the weight of the megamoney stimulus effects receding which will surpass the March lows. That will usher in the real reform that is needed in the financial and real economy, letting the bankrupt too big to fail companies fail so that they can reform into a efficient and profitable business, massive tax reform including a 10% flat Personal and Corporate Income tax and massive investment in infrastructure which seems to have taken a back seat in the Obama Administration.

Sep 26 06:47 AM