Marc Courtenay's  Instablog

Many pundits are saying that the dollar is ready to crash and burn, signaling a time of mounting inflation. But some reputable sources disagree.Robert Prechter, president of Elliott Wave International, is calling for a long-term rally in the U.S. dollar. He's entitled to his opinion, but his track record gets my attention.

Prechter, famous for such important calls as the 1987 crash, the 2007 top in stocks, and the 2008 peak in oil prices, says he sees significant evidence the dollar has put in a major bottom and should rally for the next year or two, bringing down most other asset classes in the process. He thinks that The biggest risk to the economy is deflation not inflation.

Prechter has been wrong before. I remember reading one of his books in 2003 in which he seemed to be calling for an imminent crash in the U.S. stock market and another Great Depression. Stocks soared from April 2003 through July 2007.

Many analysts and mainstream news sources attribute the recent uptick in the dollar versus other major currencies to an improving economy signaled by last Friday's "stronger-than-expected U.S. jobs numbers."

"The dollar index is coming off a deeply oversold condition and bounced off the bottom of the Bollinger Bands," said Andrew Bekoff, chief investment strategist at Family Office Group in New York. "We have seen that rally take us back to the 20-day moving average at 78.79."

Prechter, who is famous for being a contrarian, says the U.S. dollar has put in a major bottom but not for the reasons everyone else is pointing to. Prechter points to three factors:

• The Elliott Wave Pattern: Without getting too technical (for your sake and mine) Elliott Wave Theory looks at markets cycles in terms of wave structures that come in five parts. Five waves up followed by five waves down. Well, according to Prechter's research the pattern confirms we recently hit the fifth wave down. Next stop: up.
• Sentiment has reached an extreme: "The Dollar Sentiment Index for the Dollar Index reports just 3% bulls among traders, an extreme level only five times in the past 20 years, usually near an important low," Prechter wrote on Aug. 5. "The last time we saw readings like this was March-July 2008, just before the dollar soared." In other words, the  "short the dollar" trade is overly crowded.
• The biggest risk to the economy is deflation not inflation: As he lays out in his book, Conquer the Crash, Prechter thinks the bursting of the latest bubble will lead to a major economic depression.

Read full article…and listen to the interview from Yahoo! Finance Tech Ticker. Prechter sees an immediate threat to the credit markets and debt instruments. If gold has decoupled from the dollar, it might not negatively be impacted by the dollar's rally.

But as we saw last summer and fall, sometimes everything but the dollar and US treasuries can collapse in price. That's why I decided to hedge by buying some Vanguard Extended Duration Treasury ETF (NYSE:EDV).
 

The implications for the stock market, the credit markets and many commodities are negative according to Prechter. He's calling for a "major implosion" in the current credit structure.   

The Dollar Sentiment Index for the U.S. Dollar reports just 3% of traders are bullish on the dollar, which is a powerful contrarian signal. According to many experts this is an extreme low in bullish sentiment seen only 5 times in the past 20 years, and has often been the harbinger of the dollar moving dramatically higher against other currencies.

Will this cause the long-awaited correction in GLD, SLV, CEF, and IAU? Are investors getting closer to a time when it makes sense to take some stock market profits off the table and begin nibbling at SKF, SBB, DOG, DUG and DZZ?

All the above are ETFs are investors should familiarize themselves with them. Remember this about a potential rally in the dollar: It doesn't mean it necessitates an immediate end to the stock market rally.

Companies like General Electric (NYSE:GE), Alcoa (NYSE:AA), DuPont (NYSE:DD) and NYSE Euronext (NYSE:NYX) might, and I mean "might", have a ways to run yet before stocks next their next dramatic plunge.

Don't forget to keep reading The Bear Facts Stock Market Report at  www.bearfactsspecialistreport.com/. The importance of free information like this is to be ever-mindful of what really makes stocks and commodities go up and down.

Disclosure: I own GLD, SLV, CEF, EDV, AA, and NYX

Please Note: This article is to inform you not to lead your thinking. Only you can decide the best place for your money and the timing of your investment decisions.
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