Simit Patel's  Instablog

Decoupling is basically the idea that the global economy will change in the sense that it will no longer be driven by US consumption. Instead of the rest of the world lending the US money so that the US can buy their products/services, countries will invest in their own consumption, and the US will lose its inflow of capital.

Or at least, that is the story. Decoupling's most prominent proponent is likely to be Peter Schiff, who has been forecasting decoupling for several years now.

Is decoupling going to happen?

One piece of evidence supporting the notion is that market correlations in the US are changing. For instance, today (November 18, 2009), was a day in which US equities and the US dollar both declined in value, while precious metals rose. If foreigners stop financing the US economy, this is a trend that will continue.

For those who believe, as I do, that decoupling is increasingly likely, the opportunity is in shorting US dollar-denominated assets.

Disclosure: Short US dollar.

Well permabears like myself certainly have some explaining to do, as the DJIA is now trading at 10,400 -- above the 50% retracement level of the move down from the all time high above 14,000 to the March 2009 lows around 6500. To break above the 50% retracement makes it hard to argue that this is simply a pullback in a bear trend; now it seems more like it may actually be a bull trend.

Well, in the nominal sense, that is. Of course with the dollar continuing to fall and gold and silver continuing to rise, this is still an inflationary rally, not a rally driven by real growth. From an economics perspective, all that's happened is a wealth from everyone who uses US dollars to those who hold US equities and/or precious metals.

US Dollar Index has broken below 75 at the time of this writing. If we can break the 2008 lows (also the all-time lows) of around 71.50, it will be interesting to see what happens. If the dollar continues to slide, at some point the risk of dollar devaluation will lead to a run on the dollar, which will send all dollar-denominated assets down in value -- both in real value and in nominal value.

Simit Patel
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Permabears like myself have been quite bearish on US equities for some time now; most permabears expect the market to go back down to the March 2009 lows, if not lower.

But as the chart below illustrates, courtesy of the always insightful Jesse, the market is now playing with the 50% retracement level on the S&P's move down from its peak in the summer of 2008.
Chart via Jesse

It's do or die time for permabears: if the market can break the 50% retracement level, it's hard to think of it as a retracement in a bear trend and perhaps the beginning of a new bull market.

With that said, it is perhaps worth noting that this is not a real rally, as the "rally" is induced more so by the depreciation of the dollar than by actual growth in productivity and wealth. This is illustrated when we price the S&P in gold, as the chart below illustrates. This shows we haven't had much of a rally at all.
Chart via Jesse

Thoughts On Trading This

The dot com bubble and the housing bubble were both fueled by an expansion of the money supply, which results in currency depreciation -- a trend the US dollar has experienced for the past 10 years. How much further weakening of the US dollar can the US economy endure? That is, in my opinion, the key question that will determine how much longer the US stock market can rally.

What do you think?

Disclosure: Long gold, short US dollar.

Below is the AUDUSD weekly chart I'm watching closely. I'll re-evaluate if we can get a break above the two week high of .9327, or if we get a pullback on the hammer down to around .9050, where the 5 EMA on the weekly chart is.




I'm also watching $1050 price level on gold. When AUDUSD breaks above 9327, I'd like to see gold above $1,050.

Fundamentally, the argument is the same as always; the dollar is in trouble and current monetary policy is reinforcing those woes, and the carry trade with the higher yielding Australian dollar is on. See my blog for more on those arguments.

$1050 is a key gold support level I'm watching. We recently had a bounce off it. To preserve the strong upward trend in gold, I would like to see this support level hold. the next support level after this is $980.

to the upside, my next target is $1250, however I will be looking more closely at price action for signs of exhaustion in the bull trend.

I've been playing AUDUSD a lot this year, as I'm bullish on it on a three year outlook, and looking to ride an upwards trend.

I entered a long position at 8827 with a stop 300 pips out. Profit target is about 1,000 pips. This is based on the weekly AUDUSD chart.

The rationale here is that price has broken above the double doji on the weeklies. Moving averages are still aligned and "big picture" fundamentals remain supportive, further indicative that the bull trend is still in tact. 

I'm only half in, as I'm still waiting for a pullback, which I think is quite likely. If/when it occurs, I'll put the remaining half in. However I wanted to get half in now in the event a pullback does not occur.