Ralph Shell's  Instablog

With the equities markets forging ahead into new yearly highs yesterday, is it possible we are witnessing one of those hated, nefarious bubbles?  Nouriel Roubini,  one of the current ranking bears and a professional worry wart, has provided us with ample warnings about the consequences of a cheap dollar.  Bubbles, like bombs, need to be diffused, or like bombs, they will make a big mess when the break.  In the UK, Gordon Brown wants to enact the Tobin tax, a financial transaction tax of trading activity.  He would also set up a special tax for banks and others that engage in risky behavior.  We have yet to receive word that Washington is going to have a new czar to regulate and discourage bubbles.

The weak dollar was the most frequently cited reason for yesterday's rally, but there is more to it than that simple explanation.  Slack US economic activity has prompted the Fed to keep short term rates low, and the money supply ample in hopes of causing increased economic activity.  The cheap rates also provide funding for the carry trade.  With the carry trade, speculators and entrepreneurs  alike have funding to invest in the assets they choose.  Recovery will take a very long time if we tax and regulate the job creating entrepreneurs.

So far today the stock market has paused, and the Euro has sold off from the 1.50 level, currently trading at 1.4950.  A ZEW index of German business sentiment came in at 51.1% under the estimated 55.2 and down from the  56 in the October period.  In the US the IBD/TIPP Economic Optimism report came in at less than expectations, 47.9 versus 53.1, and 52.5 in the previous period.

The Euro's lumbering behavior is typical, advancing, and then backing and filling.

In the 4H chart shown above, the RSI is working lower out of the overbought area.  The MACD may be suggesting a market that is going to work a little lower.  The inability of the pair to spend much time above the 1.50 level, perhaps because of heavy selling at that handle is a disappointment for the bulls.  The trend remains higher, however, so lets look to buy the euro in the 1.49 area.