I HAVE BEEN WARNING that the US Dollar is the key to the health of stocks and other Dollar-denominated assets. Central banks all over the world (led by the US Fed) have been selling Dollars -- ALL of the Fed policies over the last decade have been to weaken the Dollar and create asset bubbles by doing this.
I have been short the markets the last two months. The first wave of selling trimmed 8% off the OEX. Then stocks bounced back. But that bounce seems to be ending. Why? Because the Dollar seems to be bottoming and rallying.
Here is a picture of this process. This chart shows the UUP (US Dollar Bullish ETF -- gains value when the Dollar rallies) with an overlay of the OEX (S&P 100). The OEX is in red in the top pane. All the other indicators in the chart refer to the UUP, US Dollar.
The Dollar has been pushed down by Quantitative Easing and by strong Central Bank buying. But traders seem to be fighting back. Negative news out of Europe has also taken steam out of the Euro rally.
Mario Draghi spoke of weak economic fortunes in Europe over the next six months. See story below.
This chart seems to be showing a US Dollar bottom in place and a rally beginning. This means it is time to take profits in US stocks and commodities, as we SHOULD have more selling in Dollar-denominated assets.
Note how the US DOllar has been acting as an inverse-stock force -- and this is always the case during Night-Cycle Deflations. During Day-Cycle Inflations stocks and the Dollar rally and fall together -- but during Night-Cycle Deflations there is a de-linking of stocks and the US Dollar after debt reaches a level that becomes debilitating to the Dollar. No chart shows this as clearly as the Dow-Gold Ratio (which portrays gold as what it is, the true Anti-Dollar mechanism). This chart shows the REAL value of stocks (the Dow) when priced in terms of gold -- which we can view of as the real value of stocks when priced in the terms of a declining Dollar.
In 2019, again, stocks and the Dollar will begin moving in tandem, after we destroy out mountain of debt and give up finally in our attempt to monetize the debt by weakening the value of the Dollar.
My message, I guess, is that traders should take profits now, and look for further Dollar weakness in order to get long again. The next loss in the OEX could/should be from 8%-12% but these levels are hard to predict, when we have central banks so invested in how things appear, and who are willing to do ANYTHING to put lipstick on the Pig of Deflation.
Here is the story I referred to above: IS MARIO DRAGHI TO BLAME -- we always want someone to blame -- FOR THE END OF THE EURO RALLY...!
@cnbc on Twitter
The (Exchange:EUR=), which has shown remarkable resilience recently, saw a major selloff leading to its biggest one-day loss in a month after the European Central Bank (ECB) slashed its growth estimates for this year and next, and hinted at a possible rate cut in 2013.
Despite this setback, foreign exchange strategists expect the single currency to bounce back quickly. They see the euro supported by worries over the looming "fiscal cliff" of tax hikes and spending cuts in the U.S. and uncertainty over what the Federal Reserve's next move will be after its bond buying program, "Operation Twist" - which involves selling medium-term bonds and using the proceeds to buy longer-term ones - comes to an end on December 31.
(Read more: After the Fed's "Twist" Comes the Hard Turn)
"We don't think ECB President Draghi has completely killed the rally in the euro, the currency pair has had a very nice run over the past few weeks and a correction is not unexpected," said Kathy Lien, managing director of forex strategy for BK Asset Management.
ECB chief Mario Draghi on Thursday painted a bleak outlook for the currency bloc's economy and said policymakers had discussed negative deposit rates, prompting a steep fall in the euro.
The euro, which has risen over 5 percent against the U.S. dollar since August, was trading near multi-month highs against major currencies including the greenback, British pound and Japanese yen on Thursday, giving rise to profit taking overnight.
"The euro had been built up, so yesterday's (Thursday's) move also reflected some profit taking," Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole, who expects the single currency to end the year at $1.30.
Besides uncertainty around whether the U.S. will manage to avoid the $600 billion "fiscal cliff" in January - which is negative for the dollar - Kotecha said the euro will also see some support from central bank buying.
"We've seen more flows from central banks - probably a result of reserve reallocations for the new year - which will help support the currency," he said.
Barclays' technical analyst Dhiren Sarin, who expects "choppy gains" in euro-dollar over the next one-two months, said support areas for the single currency are $1.2875 and then the 200-day average of $1.2790.
Boost From Equities
"We see this as a one to two month phenomenon, but thereafter the outlook is less clear and can't rule out a stronger pullback," Sarin said
He also expects the currency will move higher in the near-term, helped by continued flows into European equity markets, due to their recent outperformance relative to U.S. markets.
Over the past three months, major European markets including France's(Euronext Paris: .FCHI-FR) and Germany's (XETRA:.GDAXI-DE) have risen 2.6 percent and 5.1 percent, respectively, compared to a decline of 1.3 percent for the U.S.'s (^GSPC).
Euro in 2013
While the euro is expected to remain resilient in the near-term, the outlook for the currency over the next 12 months is less upbeat.
"We expect the euro to rise to $1.32-1.35 in the next quarter, but as we move through to the second quarter, we will be increasingly debating the U.S. recovery. If there is a sense that growth may be starting to recover faster than expected, this could be negative for the euro," said Robert Rennie, chief currency strategist at Westpac Institutional Bank, adding that the euro-dollar could fall to $1.25 in the second-half of 2013.
Michael Woolfolk, senior currency strategist, BNY Mellon, who is less optimistic on the prospects for the euro over both the short and medium-term, said 12 months out, he sees the currency below $1.20.
In the short-term, he said the U.S. dollar will gain favor due to risk aversion in the markets. "Expect to see between now and the end of this year some further risk coming off the table. You want to be long dollars going into the last several weeks of the year."
Over the medium-term, he expects the ECB will lower interest rates, which would be negative for the single currency.
"Draghi is very much in keeping with the G7 (nations) in supporting aggressive monetary easing, so there will be lower rates in Europe next year - it's just a matter of time," he said.
The Playing Field is NOT level. But Bernanke's plan to monetize America's debt through the crucifixion of the US Dollar ran into a storm in Europe, the continuing sage of the breakup of the European Union, and the depression in Europe which also has required lower and lower interest rates -- as nations compete to see which country can crucify their own currency fastest.
We live is a strange and decaying world. Trade carefully.
Michael J. Clark
CGTS, Hanoi, Vietnam