Expect a Short-Lived Dollar Rebound

With some U.S. Dollar strength appearing Friday morning, I am expecting a short dollar rally to relieve the brutal selloff from this week. This could have broader implications for the stock market.

You would think with stocks up and markets rallying weekly it would instill confidence and bullishness. Not for me. I see global monetary chaos.

This week, the U.S. Dollar index collapsed to new contract lows for the year, fueling a continuing rally in oil, commodities, and gold, which has been the theme for a while now. Much of it was triggered by a report in the Independent about a dark conspiracy theory in which officials on the Arabian peninsula are plotting the end to world dollar hegemoney (pun intended). It seems the dollar has been driving most of the action just about everywhere, so when the dollar falls, a wide array of commodity and equities rally. And why not? Money is free.

U.S. Dollar ETF (UUP)

The dollar is weak because U.S. Policy is to print money, buy back debt and maintain interest raties of 0%. All of this is dollar negative, because it puts more greenback confetti out into the world. It has also boosted the equity markets. While it's true you don't want to "Fight the Fed" -- and trust me, I have no interest in shorting stocks -- the money-printing strategy is dangerous and has its perils. If the dollar collapse acclerates, it risks setting off a panic among the many nations of the world which hold trillions in U.S. Dollars as a reserve currecy and start dumping dollars on the market. The world has never seen anything like that, and we really don't want to know what it looks like.

Another issue I see for the equity markets is technnical. The U.S. Dollar made new lows this week but the S&P Index has not been able to take out the high of 1072 which it made about a month ago. In other words, the sinking dollar appears to be losing some of its power to boost equity markets. This is a "divergence" that bears watching over the next few days. If the S&P fails to take out it's high next week, to me that is a big red flag that the dollar-weakness jig is up.

S&P 500 Index

The ferocious rallies in energy stocks and mining stocks leads me to belive we're nearing time for a pullback. Same with gold. The bludgeoning taken by the dollar means it's increasingly likely that bankers in Asia and Europe will soon intervene to prop up the dollar. Now, any such actions in the end will be met with failure, but that's a trade for a later time. In the meantime, I think it's possible we'll see Japan try to plug holes in the dollar dam in the next few weeks.

In my managed accounts, I lightened up on nearly everything, including energy shares and mining shares. I also sold nearly all of my gold and silver futures (I still own the hard stuff). My experience has been that the metals futures often pull back at some point in October after the beginning of the traditional fall rally, and I am hoping to be able to buy them back at better prices. My target buy price on gold is $1030 and my buy target on silver is $15. I believe that any pullbacks will be brief, so it's going to take some surgical execution to get my metals back at a lower price.

Disclosure: Temporarily shorting gold futures and GLD (for the next week or so), but long-term bullish.

Comments

[alajac:]

Couldn't you just use a limit order?

Oct 09 01:32 PM

[Gary A:]

The problem that the Fed may be aware of is that this is a very different ball game than the 70's. In the 70's we were a creditor nation and people saved money. We were able to withstand the inflation robbery. But I guarantee you that this is no longer the 70's and the consumer is tapped out. If you start raising prices on him, he will burrow down into a deep deep hole and you won't see him for another 10 years.

Go ahead, Bernanke, I dare you to rob the tapped out consumer with inflation now. You know that this will destroy the economy. The only way this consumer will ever get a raise is through a vigilant defense of the dollar. Run Geithner and Summers out of town if that is necessary for defense of the dollar.

Oct 09 01:38 PM

[ErnestY:]

This whole speculation about inflation is premature with property prices still falling and commercial/personal credit shrinking. The money printed is a drop in the bucket compared to these markets as a whole.

Oct 09 02:47 PM

[Gary A:]

Asset inflation can kill the consumer even if other factors temper across the board inflation.

Oct 09 04:40 PM

[Donald Ingram:]

Debase/Devalue the dollar. Pay debts with dollars worth less. Interest rates kept near zero. You are right in that this is a tight rope that the Fed is walking. One mistake and hyperinflation could result, which is not a currency event but a gross lack of confidence in that currency.

Oct 09 09:49 PM

[Dave Wrixon:]

"The world has never seen anything like that, and we really don't want to know what it looks like."

Oh, but we have!

Oct 10 02:29 AM

[Albertarocks:]

Bob Prechter is also forecasting a rebound in the dollar, but a rebound lasting much longer than Scott is foreseeing. If you listen to Prechter's logic, it makes a lot of sense. I have to admit though, as an amateur student of Elliott Wave theory (for more years than I care to think about), I can't quite see the bottom in the dollar that he's talking about. The wave count could be there right now, but I could make a case that it isn't quite there yet. In any event, what I think is irrelevant and I'm in no position to second guess Bob Prechter. If what he says turns out to be accurate, we're in for a nasty drop in the markets along with a strong surge in the dollar, both events running for at least a year, perhaps two. Only after that would we see the hyperinflation scenario unfold with a vengeance.

Oct 10 04:32 PM

[R. Scott Ra...:]

Today I'm out of the dollar/long gold short that's for sure. Gold is exhibiting too much strength. It appears to me to be broacasting further monetary chaos. I am playing miners like long PAAS and RGLD for now.

Oct 13 02:00 PM

[R. Scott Ra...:]

I don't understand Prechter. He seems to be grasping at straws with his Elliot Wave HOcus-Pocus


On Oct 10 04:32 PM Albertarocks wrote:

> Bob Prechter is also forecasting a rebound in the dollar, but a rebound
> lasting much longer than Scott is foreseeing. If you listen to Prechter's
> logic, it makes a lot of sense. I have to admit though, as an amateur
> student of Elliott Wave theory (for more years than I care to think
> about), I can't quite see the bottom in the dollar that he's talking
> about. The wave count could be there right now, but I could make
> a case that it isn't quite there yet. In any event, what I think
> is irrelevant and I'm in no position to second guess Bob Prechter.
> If what he says turns out to be accurate, we're in for a nasty drop
> in the markets along with a strong surge in the dollar, both events
> running for at least a year, perhaps two. Only after that would we
> see the hyperinflation scenario unfold with a vengeance.

Oct 13 02:02 PM