Market's Continuing Theme: Sell the Dollar and Buy Stocks

This seems to be a continuing theme for whoever is driving the markets to the moon, sell the dollar and buy equities. If you were watching yesterday you would have noticed that oil, gold and stocks were trading down to relatively flat. Right about 12:00 the dollar started to decline which drove stocks and commodities higher.

This is a continuing trend within the markets and the primary reason why we have had such a dramatic rally. However, the reduction in buying power is not worth the trade off, in my opinion. If you are watching the news channels they attribute the market's turn on higher oil prices and virtually ignore the dollar's plight, even though it is a weak dollar that moves oil. Why are they ignoring a declining dollar, I do not know, but they are.

There was really no reason for the market to be positive yesterday as unemployment numbers were not very good, but, I guess, no revision in 2Q09 GDP was somewhat good news. Either way, we are seeing continuations of a very tired bull market where the likes of AIG, Citi (C), Fannie (FNM) and Freddie (FRE) are the market leaders. While the talking heads applaud this move I am reducing my equity position to 7%, down from 25%, most of which is international holdings.

Frankly, we are setting ourselves up for a most painful selloff which I am choosing to not participate in. I do not know when it is coming, but it will come and I am sure it will be brutal. The likes of Mark Haines seem to think that my view is very bullish for stocks; maybe it is, but I consider my view to be balanced with the data on hand. The data I see is horrible, frankly, and when AIG and Citi, both of which are heavily owned by the government, are the market leaders then we have a serious speculation bubble building.

Examine the chart below (click to enlarge), the data at hand and make your own call. I am sticking with the call I made 3 weeks ago, which we are barely 2% higher than now, of a market top. Of all the people I have spoken to, no one understands why we have not sold off yet and, perhaps, we will not. Until earnings catch up with valuations or valuations trade down to earnings I am very bearish on equities.

Comments

[redbaron]

There have been those trying to talk down the market, all the way along this move since March 9, and so far, they have all been wrong. Mark Haines, as I understand him, is just pointing out that this negativism has been good for this move, as the market has 'climbed a wall of worry' the entire way. My personal view is that the market was extremely oversold on the downside, and if it goes to the same extreme on the upside, we may well have some more to run up. It will correct at some point, but why not enjoy the ride until that happens? The futures are positive for Friday (8/28) morning again, and oil is also up again, so at this point, there seems to be no reversal in sight.

2009 Aug 28 06:02 AM

[tobi]

China is down another 3 % and usually it is ahead of american markets. Currently equities and commodities have formed an entitiy driving each other higher with no fundamental backing, which can be seen in the fact that the BDI is significantly lower already, so if there was an increased demand for commodities those rates would be rising, which tells us "a lot of people everythwere are not buying anything" compared to "somebody somewhere is buying something". Most of the demand will be filling up stockpiles but there will be little done beyond. Despite record now utilitization rates destillates stockpiles are up and natural gas has no demand either yet. In addition, higher oil prices have a parasitic nature and are no real reason for the market to cheer higher, every dollar americans have to spent on oil products ends up in the chest of rather unfriendly foreign governments instead of electronics, services and industry products. It's not all gloom and doom as in March, but the market is significantly higher and one has to ask whether it is too high. It does not matter whether it was oversold in the past, it matters how it's NOW.Past good news this week barely produced a flat market, so that should be an alarm sign. Sure there can be more upside, but the risk reward sheme now cleary points to downside danger. The market is up slightly premarket, but given the large moves in the first minutes of trading, that matters little. Financial Zombies are making up a huge part of trading (AIG for example) and if one takes those out of volume, there is no volume left! There is a time when less bad does not equal good anymore and that will be the time we will have a problem.

2009 Aug 28 06:36 AM

[manya05]

The negative correlation you see between S&P and USD has been in place for some time now. The dollar is the new carry trade currency (as the yen was for most of the last 10+ years). That is why if you are short dollars, you better keep the finger on the trigger and the moment you see the market correction come, get out of your short-dollar position.

2009 Aug 28 08:31 AM

[inthemoney]

> The futures are positive for Friday (8/28) morning again, and oil is also up again, so at this point, there seems to be no reversal in sight.

Can you guess why? Dollar is down again. It has only 4% to go to getting 1.5 on EUR/USD. There is no way it goes past that easily, which means the time for waek dollar supporting the sotck market is running out.

2009 Aug 28 09:31 AM

[Hot Richard]

Never understood this act by investors. Dollar down, so bullish on stocks dependent upon the dollar economy. I believe a more macro view is needed. Real issues with US economy lead to real issues with US-based equities.

2009 Aug 28 10:25 AM

[Gtarras]

if you sell the dollar, what do you buy the stocks with?

2009 Aug 28 11:16 PM

[Gtarras]

i am personally amused by claims of most bloggers, including those on SA, that the current sentiment is too bullish. huh? maybe it is not so negative as it used to be in March, but it is still overhelmingly bearish. i am being trashed everywhere i leave a comment suggesting we are still going up.


On Aug 28 06:02 AM redbaron wrote:

> There have been those trying to talk down the market, all the way
> along this move since March 9, and so far, they have all been wrong.
> Mark Haines, as I understand him, is just pointing out that this
> negativism has been good for this move, as the market has 'climbed
> a wall of worry' the entire way. My personal view is that the market
> was extremely oversold on the downside, and if it goes to the same
> extreme on the upside, we may well have some more to run up. It
> will correct at some point, but why not enjoy the ride until that
> happens? The futures are positive for Friday (8/28) morning again,
> and oil is also up again, so at this point, there seems to be no
> reversal in sight.

2009 Aug 28 11:20 PM

[Suncatcher]

All the sentiment indicators are high- way high. If you venture out into the main media and general public a majority are claiming the crisis is over. That is the set up for the correction.

2009 Aug 29 02:51 AM

[Responsibility]

"Sell the dollar and buy stocks" is one of several proposed reasons for the market uptrend.

But as a couple of commenters have already suggested that "sell the dollar" is apparently contradictary to "buy stocks". I tend to agree and want to point out that an improving economy is at least as equally the reason for an up market, given that there are continuing issues to tackle.

2009 Aug 30 02:44 AM

[bartpr]

since mar the dollar yen ratio has gone from 100 to 94. this is hardly a major downtrend in the dollar. prior to mar it rallied then failed. hardly a strong divergence with the market. one days chart is meaningless, imo. a correction will come, no doubt. a correctin occurred in 2004 after a strong move from the 2003 bottom. no one can say how deep the correction will be, certainly not based on your analysis..

2009 Aug 30 05:44 PM

[Ray]

With the immense liquidity being injected into the markets i have to agree that the market can go higher. However, we are trading a weaker currency for stronger stocks which makes no sense to me. There is no need to trash your opinion as it is valid. I happen to think the bullish indicators are high, very high. If you are comfortable buying stocks at 130x earnings then go for it, but it is highly irregular for the market to go parabolic and dangerous. Perfection is no priced into equities, in my opinion. My point is that there is a direct correlation between the weakness of the dollar and higher stock prices. One needs to be aware of such correlations to make sure they don't get hurt.


On Aug 28 11:20 PM Gtarras wrote:

> i am personally amused by claims of most bloggers, including those
> on SA, that the current sentiment is too bullish. huh? maybe it is
> not so negative as it used to be in March, but it is still overhelmingly
> bearish. i am being trashed everywhere i leave a comment suggesting
> we are still going up.

2009 Aug 30 09:22 PM

[Ray]

The article was meant to show the correlation between rising stocks and a weakening dollar. I certainly made no estimation on how deep a correction will come or if it will come. I do think we will have a strong back to reality correction soon, but the point is that this is not a 1 day correlation it is a multi-month correlation. Pull the chart and decide for yourself.


On Aug 30 05:44 PM bartpr wrote:

> since mar the dollar yen ratio has gone from 100 to 94. this is
> hardly a major downtrend in the dollar. prior to mar it rallied
> then failed. hardly a strong divergence with the market. one days
> chart is meaningless, imo. a correction will come, no doubt. a
> correctin occurred in 2004 after a strong move from the 2003 bottom.
> no one can say how deep the correction will be, certainly not based
> on your analysis..

2009 Aug 30 09:25 PM