Stock Market's Future Hinges On Dollar Verdict, And Gold Is King

 |  Includes: DIA, GLD, IAU, KBE, QQQ, SPY, UDN, UUP
by: Carlos X. Alexandre

With Ben Bernanke in the wings and his already famous speech at Jackson Hole before he even speaks having some weight on market movements, the inverse correlation between the dollar and equities is the one variable to keep in mind. Granted that the correlation has not always held up over the years, but in recent history it has been inverse.

Ultimately, many are expecting Ben to throw a life vest and announce that further easing, in one form or another, will force the greenback to head south. After all, how can he allow the stock market to sink? Of course, if Mr. Bernanke is less than clear or voices his concern about inflation - or deflation depending on his mood - the reaction will be felt accordingly.

One thing is certain: Mr. Bernanke will say something, even if his words are ultimately meaningless. But the markets will derive some meaning, whether one likes it or not. Meanwhile, we cannot dismiss the European variable.

As reported by Bloomberg, Alan Greenspan sees euro trouble, and I thought that he had retired. Apparently not, and he didn't mince any words telling us what we already know.

"The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” Greenspan said today in Washington.

He also added that gold is not a bubble, and provided his insight, although he doesn't have many friends among gold bugs. But like in "Survivor," alliances do change.

“Gold, unlike all other commodities, is a currency,” he said. “And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”

Could it be that gold’s drop over the last 48 hours is a result of someone having a dream about an adverse speech by Ben Bernanke, or a response to Greenspan's remarks? If Mr. Greenspan is a gold bull maybe it's time to call it a day. Some even associated the durable goods orders, one of the least reliable indicators, with the drop in gold prices because QE3 is now less likely. I hate to sound condescending but ... really?

To bring perspective to recent market history, the Dow Jones Industrials has dropped over 1,700 points since May while the dollar index established a firm base around 74. If the dollar starts heading north, then the pressure will be on, even if one thinks that stocks are a bargain by all measures.

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Thus the point is quite simple. If the dollar strengthens at this juncture, equities will move in the opposite direction, regardless of complex ratios and the best analysis and valuation methods available to mankind.

Lastly, I recently read various opinions regarding the Fed’s potential new flavors of quantitative easing and monetary maneuvering, including the repo market and all that jazz. Technically, it sounds wonderful, but the one thing that cannot be addressed by all these exotic formulas and schemes, even if one shoves 1,000 finance PhDs into a room, is quite simple: consumer sentiment.

And the following analogy is easier to grasp for those that are neck deep in the windowless world of financial algorithms. HP (NYSE:HPQ) devised a good device and called it the TouchPad. Without getting into whether it was better than Apple’s (NASDAQ:AAPL) iPad or not – I didn't evaluate it -- the fact remains that the consumer didn’t show up, although many bright engineers were behind the product. The lesson: Consumers will always tell us how truly successful our ideas are, regardless of our perceived brain power and complexity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.