Extracted from the May 30th, 2011 Market Update
We spent a lot of time on the dollar and the euro this month; we are going to highlight some of those comments because they encapsulate what we have been saying for the past several weeks. The Euro has begun its downward journey, and conversely the dollar appears to have put in a bottom. The final confirmation will be a weekly close above 77.50; until this achieved the dollar is going to be locked in a volatile trading range.
Subscribers will remember when the dollar was rallying; we stated that the situation in the US was not any better or worse than in Europe and that the press was once again up to its normal tricks. At some point in time, the press is going to start highlighting the problems facing Europe; with each story, they will make the problems look direr. If the dollar starts to rally, these stories will push the dollar higher than it would have traded under its own impetus; this is exactly what is currently taking place with the euro; it overshot its stated targets because the dollar has been besieged with one negative story after another.
Continue to hold onto your EUO positions for it’s a safe and simple way to short the Euro. If you have extra funds then consider deploying another portion should the Euro/USD hit the 1.50 ranges.
A crisis in Europe would trigger a massive rush into the dollar. Believe it or not whenever there is a crisis overseas, the majority of the investors do not rush into precious metals but instead jump right into US treasury bonds. This was clearly demonstrated during the financial crisis of 2008. If this comes to pass then the entire commodities sector will experience an even stronger correction than is currently being projected.
One thing every single person needs to remember is that every single bull market has experienced several strong corrections and at least one incredibly painful correction; there has never been an exception to this rule and there will never be. Commodities are slowly falling down one by one, it is just a matter of time before oil and precious metals are hit.
Despite the dollar trading to new lows, there are still many signals that continue to validate that the dollar is going to mount a multi month rally. The time frames have moved but the pattern has not turned bearish.
Lastly, everyone is harping about the dollar trading to new lows; in reality its July 2008 low is still holding, but many commodities have traded to new all time highs. This development alone is one of the largest possible positive divergence signals any market can or could ever generate. This development will remain in effect until the dollar trades to a new all time low. It would have to trade below 71.76 on a weekly basis to invalidate this bullish development. This development would take on even more meaning if it the dollar were to put in a bottom formation. In other words, the bullish signal would become 3 times stronger. Market update May 4, 2011
The press as expected is now shifting the focus from the dollar to the euro; at least in terms of negative stories. The new line is that Greece is going to have to restructure its debt sooner or later. There is nothing new about this; the EU members were well aware of this the first time they decided to provide loans to Greece. They knew at that point that the can was simply being kicked further down the road.
At this rate the only way Greece will ever manage to pay these loans is if the ECB continues to lend it more money. The stronger members are already raising serious objection and so it remains to be seen if Greece will continue to receive funds so easily in the future.
Everyone is focusing on Greece. Portugal and Ireland are also in trouble, and Spain is just holding up by a thread. The PIIGS as a group are in trouble and should economic conditions worsen then expect them all to come to the table begging for more funds. The European financial stability facility might not have the funds to deal with requests from so many nations. A bailout of Spain would place enormous stress on this facility without any other of the PIIGS coming to the table for additional funds. Spain continues to state that everything is fine and they will not need any funds; this is the same line Greece, Portugal and Ireland used before they suddenly changed their minds.
Increasingly, it appears that these nations are in between a hard place and rock, especially Greece. Expect the press to hype these stories up. Always remember the big picture; every nation wants a weaker currency, even though they might claim otherwise. A strong Euro has a negative impact on exports as it makes them more expensive. Germany the largest exporter in the zone is already very happy that the euro has fallen so fast in such a short period of time, even though they will pretend they are not.
Defaulting is not the only solution; there is a simpler solution; live within your means. This solution involves a lot of pain, and so no one wants to deal with it now.
Individuals have become used to the concept of getting a lot for next to nothing and the only way to kill this mentality is to take away the whole cake. When a person losses everything, only then are they willing to commit to drastic changes; at that point they are even willing to settle for crumbs. Until this occurs, they will refuse to take a smaller slice of the cake even though they are aware that at some point in time there will be nothing left. Pain is the only cure for debt induced addiction. The irony is that eventually they will settle for next to nothing because there will be nothing left.
There are rumours that Greece is looking for a way to leave the EU and or talking about the possibility of restructuring its deb. Despite the strong denials, one should remember that such rumours are usually based on some form of truth, especially when it’s the government that is doing the denying. Governments are notorious for lying through their teeth. The 10 year yields reflect that all is not well with the PIIGS; Portugal at 8.77%, Ireland at 9.9%, Italy at 4.62%, Spain at 5.34% and Greece at a whopping 15.45%.
If you have not already moved out some of your funds from the euro, then consider doing it now. In addition you can use strong rallies to lighten up your position further. As the dollar rallies we expect all the major currencies to experience back breaking corrections. The action of the past few days serves as a clear reminder of what lies in store in the months to come. Ironically the best investment for the next few months is going to be the hated dollar.
While the dollar has been in a downtrend, the above chart clearly indicates that all the noise made to date is nothing but noise. It has yet to match the low it traded to in July 2008; the low was 71.76. Thus if the dollar manages to put in a bottom at any point above this mark, it is going to increase the intensity of these positive divergence signal by a factor of 3. While the majority of the other markets have soared to a series of new all time highs the Dollar so far has not put in a series of new all time lows.
In terms of price action; the dollar needs a weekly close above 74.50 to indicate that a bottom is starting to take shape.
The weekly close above 74.50 in record time was a strong positive development and validates the outlook that the dollar has put in a bottom. Last week we stated that the dollar would need to close above 76.40 on a weekly basis to generate the next confirmation. This is still valid, but the strongest confirmation would be for it to trade above 77.50 for 3 days in a row. The current pull back the dollar is experiencing is a normal reaction given the strength of the initial move. However, nothing has changed in Europe and one could argue that the situation actually looks worse now than it did last year.
In the precious metal's sector we are already witnessing signs of a blow up top. Absolutely, nobody is buying silver at above 40 dollars because they are afraid of inflation. Forget it, the only reason they are jumping in is because they want to speculate. They are mad they missed the ride so far, and they are determined that they are going to get a piece of the action.
Another sign of a blow off top is a market mounting a mediocre pull back and then rallying very strongly from there. This is precisely what took place in the silver and gold markets; they experienced a very tiny pull back and then raced upwards. Market update May 4, 2011
The strong reaction from the commodities sector in general clearly suggests that some sort of top is in place. A rebound should be expected over the next 1-2 weeks and investors should use this to close out half their positions in Gold bullion, Palladium bullion and Silver bullion. Continue trying to get rid of your silver in the $40-45 ranges.
Note that strong currencies such as the Swiss franc, Oz Dollar and Canadian dollar have all experienced very strong pull backs. If the dollar should make it to the 77.50 mark, expect these pull backs to turn into brutal corrections.
V readings do not only impact the equity markets (Dow, SPX, NASDAQ etc) but they have an impact on all the markets, especially the currency markets. This index is now trading at 2140, another all time new high and 140 points above the red zone. Markets across the board will continue to experience erratic moves in all time frames until these readings start to stabilize. Some markets have already experienced initial trend changes. This development therefore indicates that many of the markets that experienced extremely strong upward moves could now potentially face even stronger downward moves as V readings are not dropping. Remember that high V readings have the ability of extending the trading range well beyond what was originally projected. Any market experiencing a trend change with such high readings is almost guaranteed to experience an even stronger correction as these readings are significantly higher then they were back in 2009, when most markets were putting in bottoming formations.
In terms of the Euro, high V readings could have an even stronger impact when one considers the following facts. The euro was the only major currency that was unable to put in a series of new highs in the face of a weaker dollar.
Secondly, if one looks at 3 year chart one will see that the euro has put in series of lower highs instead of surging to new highs as all the other currencies have (Franc, Oz dollar, Canadian dollar, South African Rand, etc,). The first high was set in July 2008 at 159.88, the second on the 2nd of Nov 2008 at 151.44 and the 3rd in May 2011at 149.25. Short term charts made the Euros upward moves appear bullish, but this chart indicates that the Euro has been weakening for a long time in the face of a weak dollar.
Thirdly, from this chart it appears that the Euro might have already put in a multi month high back in July of 2008, the euro has repeatedly failed to take out these highs. This leads to a very unlikely question. Could the euro and the Dollar (the two major currencies) eventually trend in the same direction? In other words, could the euro break down to a series of new all time lows in unison with the dollar? This is certainly something to think about especially as both of them face significant hurdles in months and years to come.
The Euro briefly traded above its main downtrend line; let’s see if it can hold above 140.00. A break below 140 will result in a resumption of the downtrend. The Dollar has generated one of the strongest positive divergence signals any market is capable of generating and the euro has generated one of the strongest negative divergent signals any market is capable of generating. These two factors suggest/indicate that the Euro could cut through 128 and test its 2010 lows; potentially the Euro could go on to put in a series of all time new lows. Traders with extra money would do well to use any strong rally in the euro to open new positions in EUO ( a safe way to short the Euro). Europeans should consider moving a portion of their funds into the dollar and then later on (as the dollar is not expected to rally forever) into Silver, Palladium and Gold bullion.
The long term trend in the euro is still negative despite having rallied for almost one year. Even the strong leg up from Jan 2011 to early May 2011 did not have an impact. It is the only major currency that has put in 3 lower highs instead putting in a series of new highs in the face weak and down trending dollar. .
European banks remain saddled with almost 100 billion euros of Greek government debt they can't sell, hedge or ignore, after a number of recent deals to offload the exposure to reduce the impact of a possible default ended in failure, according to bankers involved. The deals have been thwarted by a lack of willing buyers for the debt -- even at record low prices -- and that exposed lenders have been unable to buy protection because of the high costs, with top bankers advising their clients all they can now do is cross their fingers and hope for the best.
"The vast majority of these banks have just been unable to do anything," said one European banker who has advised dozens of such banks. "Protection is too expensive, and markets for these bonds are illiquid, so many are riding out the problem. Right now, all they can do is shut their eyes and hope."
Greek domestic banks are by far the biggest holders of the country's bonds with some 50 billion euros of exposure, according to a handful of estimates. But another 50 billion is held at banks outside the country, with German banks alone exposed to around 19 billion of the paper, while French banks hold another 15 billion. "For a lot of banks, their worst nightmare seems to be coming true," said another investment banker who advises financial institutions on the continent. "We now know that the Greek smoke was indeed fire and a lot of people have now found themselves heavily exposed."
It's the denouement of a once-popular carry trade that has fabulously backfired. Tempted by easy profits Greek debt paid slightly higher interest than similarly-rated German paper lenders from across Europe bought up the bonds through most of the last decade to hold as part of their mandatory capital buffers. Full Story
This situation is known as being caught between a hard place and a rock. A very similar fate could lie in store for Portugal and Ireland. Greek bonds are basically on par with garbage but no one is willing to say this as the hope is that something miraculous will transpire.