Buck Is Bottoming: Time to Go Long

Three weeks ago, we discussed the possibility the the dollar was bottoming and poised for a major rally.

My reasoning was that:

• Sentiment was overwhelmingly negative on the buck. I noticed that even traditional contrarian investment sources appeared to be piling on. When there's nobody left to sell, that's usually a good sign that the bottom is in.

• We still appear to be in a period of debt deflation, which the Federal Reserve is basically helpless in preventing, because we have a credit based system. When credit goes away, it's gone forever. You can't print credit.

• The Japanese Central Bank, despite its best efforts, was ultimately unable to produce inflation since their credit bubble popped in 1990. And if the old joke is that their central bank was so incompetent that it couldn't destroy its own currency, I didn't know why ours would be any different.

What's happened in the last few weeks?

Pulling up the chart, the dollar appears to be forming a bottom. The 77 mark has held.

Is the buck bottoming?

(Source: Barchart.com)

The equity and commodity markets look toppy. Investor sentiment is overwhelmingly bullish. The AAII index, a very reliable contrarian indicator, is at levels not seen since November 2007.

Furthermore, China, the posterchild of this rally, has turned down - the Shanghai Index rolled over a few weeks ago...along with several key commodities. Gold is yet to break $1,000 decisively, despite the widespread belief that the Fed has successfully created inflation.

Add it all up, and we've got some very bearish pieces staring us in the face. And if we do see another massive deflationary wave down...is there any reason to believe it will behave differently than the last?

I don't think so. So I'm taking some cues from the markets, and positioning myself in the only asset that held up and even rallied the last time around - the US dollar.

Comments

[Dave Wrixon:]

Yes, the old safe haven chestnut.

But what happens if people actually the US is the epicenter of the problem, and that safety represents anything that is not redeemable in dollars.

Aug 31 05:35 AM

[Roger Knights:]

I think stocks, etc. are heading down, and there will be a safety-flight move to the dollar for a few months or even half a year. The dollar's day of reckoning is at least a year off, Marc Faber predicts.

Aug 31 07:21 AM

[Roger Knights:]

I think stocks, etc. are heading down, and there will be a safety-flight move to the dollar for a few months or even half a year. The dollar's day of reckoning is at least a year off, Marc Faber predicts.

Aug 31 07:21 AM

[basehitz:]

Precter was recently interviewed on Tech Ticker. He sees 1-2 year bull market in USD.
finance.yahoo.com/tech...

As hard as that seems to believe, this robotic market continues to buy USD when equities sell. Commodities of course sell off when that happens and US Treasuries have been a beneficiary of HAL9000. I’m looking to position for that via long UST, short stocks, out of all commodities.

Aug 31 09:15 AM

[sbenard:]

Go Brett! I hope you're right! Should keep prices of commodities and inflation in check. Will be watching to see!

Aug 31 10:51 AM

[Tony Daltorio:]

Why do the deflationists always point to Japan - a very small, closed society that is almost entirely dependent on exports? The United States is nothing like Japan.

Aug 31 12:47 PM