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Will The 'Friday Effect' Save The Day?

As many of our readers now by know the market rarely sells off sharply on a Friday. Today is also options expiration in the month of August which could make for a very light volume trading session after the first couple of hours after the open. This morning the U.S. Dollar Index surged higher by 0.70 cents to $83.14. While this does not sound like a big move in the dollar it certainly is in the currency world. When the dollar rallies the major stock market indexes will often deflate and trade lower. When the U.S. Dollar Index declines the opposite is true as the major stock indexes will inflate higher.

This morning most commodity stocks are starting the trading day lower due to the rise in the U.S. Dollar. Leading commodity stocks such as United States Steel Corp (NYSE:X), and Cliffs Natural Resources Inc (NYSE:CLF) are both trading lower at the open. These stocks will generally trade higher once and if the U.S. Dollar Index pulls back.

Yesterday the markets declined very sharply in much higher volume. This is a sign of weakness for the major indexes. Therefore, it would only be natural to expect more downside to follow. However, rarely do we see the markets drop sharply on a Friday. The major institutions that move the market do not want to scare the U.S. consumer ahead of the weekend when people spend money. Remember the U.S. consumer spending accounts for seventy percent of the gross domestic product in the United States. The major institutions also do not want to cause panic over the weekend in the Asian markets that will open on Sunday evening when most traders in the U.S. are asleep.

The key for today is likely to be the U.S. Dollar Index. Should the dollar remain strong the major stock market indexes should remain under pressure. If the dollar starts to decline and sell off as it often does on a Friday then look for the major stock market indexes to rally off the lows. It is very rare that we see the Dow Jones Industrial Average(DJIA) trade lower by more than 100.00 point on a Friday. Often the DJIA will trade either up or down 30.0 points. This morning the markets look weak so we shall see where it closes and if the 'Friday Effect' will take hold.

Nicholas Santiago
Chief Market Strategist