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Why the "Reflation Trade" is Being Exposed as a Complete Fraud

|Includes: GDX, SDS, PowerShares DB USD Bull ETF (UUP)
The "reflation" trade
Just a standard retracement?
The bear may be back!

They Are Still "All the Same Markets"

Like many of our astute readers, I was not impressed by the reflation trade. While the strength of the rally was indeed quite substantial, when you sum it up, it was a mirror image of the rally that occurred in 1930.

We mused on January 3rd of this year that we hadn't yet seen anything to invalidate the "All The Same Markets" hypothesis (which is courtesy of Bob Prechter). And the tailspin that the markets have begun seems to further validate this.

The S&P has dropped nearly 100 points in the last few weeks!

Source: Barchart.com

How about gold, everyone's favorite "safe haven"? Since it's December top (marked by it'scelebrated status by the Today Show), it's been a safe trade alright - for gold shorts, that is!

(Source: Barchart.com)
 
How's oil done? After all, the world's running out of it, and China needs it...

(Source: Barchart.com)

As Mark Twain may say, were he an investment blogger alive today: "These charts may not be exactly the same, but they sure rhyme like hell!"
 
Their inverse? The dollar, of course! In the January 3rd column, we identified the dollar as the linchpin to this whole equation. Since that time, it's looked quite frisky - proving that these other markets can't do "jack" while the dollar is rallying - just like 2008.
 
Is that a roll of silver dollars in your pocket...or are you just happy to see me?
(Source: Barchart.com)

In summary, all we've seen in the reflation trade was a typical retracement, in which markets usually retrace 50-62.5% of their previous losses.

Why does this happen? Honestly I don't have a clue - it just seems to be the way of the financial universe (and possibly the universe in general).

So where - and when - will this end? Well, if these were in fact mere retracements we've witnessed, then you'd expect that new lows will be registered by the time this swing down is over. Which would translate to the S&P below 600, Gold below $700, Oil below $30, and so on.

Moral of the story, I think the two best moves right now are to: 1) Get safe, and 2) Get short (with speculative capital).

Near term we could certainly see the bounce that started yesterday afternoon continue up - maybe bringing the S&P around 1100 - who knows.
 
What would invalidate my cheery outlook? New highs in the S&P and other markets would indicate I'm either early in my downtrend speculation, or wrong. But I do think the most probable direction is now DOWN.
 

Disclosure: short S&P, long UUP