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Permabears Sweating Bullets as S&P Rally Continues Testing 50% Retracement Level

|Includes: GLD, SPDR S&P 500 Trust ETF (SPY), UDN, UUP

Permabears like myself have been quite bearish on US equities for some time now; most permabears expect the market to go back down to the March 2009 lows, if not lower.

But as the chart below illustrates, courtesy of the always insightful Jesse, the market is now playing with the 50% retracement level on the S&P's move down from its peak in the summer of 2008.

   

Chart via Jesse

It's do or die time for permabears: if the market can break the 50% retracement level, it's hard to think of it as a retracement in a bear trend and perhaps the beginning of a new bull market.

With that said, it is perhaps worth noting that this is not a real rally, as the "rally" is induced more so by the depreciation of the dollar than by actual growth in productivity and wealth. This is illustrated when we price the S&P in gold, as the chart below illustrates. This shows we haven't had much of a rally at all.
   

Chart via Jesse

Thoughts On Trading This

The dot com bubble and the housing bubble were both fueled by an expansion of the money supply, which results in currency depreciation -- a trend the US dollar has experienced for the past 10 years. How much further weakening of the US dollar can the US economy endure? That is, in my opinion, the key question that will determine how much longer the US stock market can rally.

What do you think?

Disclosure: Long gold, short US dollar.