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The Real Kiss of Death

|Includes: Freeport-McMoRan Inc. (FCX), RIO, X

Recently before the stock market bounce in early July the majority of traders and investors were frightened by the so called death cross on the Dow Jones Industrial Average and the S&P 500 Index. This is when a major moving average on a chart crosses over the larger moving average to the downside. Many regard this so called death cross as a very bearish stock market signal. At the same time as the death cross there was also a massive head and shoulders top in place that was publicized on every business news channel and radio program around the world. Obviously when everyone is talking about the same thing rarely will the stock market accommodate and allow that bearish pattern to play out as expected. While every trader and investor is talking about these negative chart factors they should really look at the real kiss of death for the market.

The real kiss of death for the stock market is when the stocks and the U.S. Dollar decline simultaneously. Remember when the dollar declines the stock markets are supposed to inflate and trade higher. Therefore, if the U.S. Dollar and the major stock market indexes decline together that is telling us a much larger problem is taking place. The major problem would be deflation to the highest degree. During the 2009 rally the saving grace for the stock market and the leading catalyst was that the declining U.S. Dollar. As the dollar dropped most stocks and commodities inflated much higher. Just look at how the leading commodity stocks such as Freeport McMoRan Copper & Gold INC (NYSE:FCX), United States Steel Corp (NYSE:X), and Rio Tinto plc (NYSE:RTP) traded in 2009. These stocks soared on the back of the weaker U.S. Dollar. Since the dollar rally in 2010 these leading companies have struggled greatly.

When the major stock market indexes decline with the dollar and gold use caution because this is a signal that cannot easily be fixed. Deflation is a very powerful force that few understand. Over the past 100 years in the stock markets it has been inflation that has propped the stock markets, housing markets and the price of a movie theater ticket higher. When the market can no longer inflate on the back of the weaker U.S. Dollar beware.

Nicholas Santiago
Chief Market Strategist