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Putting the Dollar & Interest Rates in Focus

|Includes: iShares 7-10 Year Treasury Bond ETF (IEF)

I have a quote on my desk from when I first started investing, “stocks never sell for what they are worth, but, what people think they are worth.” This came from a conversation with a mutual fund manager whom I sure got it from somewhere else. But, the point made always keeps me on track! The reality of that statement has saved me more headache and consternation than any other. Especially in periods which we are currently trading. We could all list reasons for stocks to move lower, yet they have continued to move higher. Attempting to rationalize and determine why is almost akin to why a 50 to 1 odds horse won the Kentucky Derby. Sure after it happens there are all kind of reasons given for the outcome, but while you are in the midst of the battle it never really makes sense. Thus, stop trying to make it rationale and just take what the market gives you! It will make complete since later (kidding).

There are parts of the market making a case for the upside and there are parts of the market making a case for the downside. Last night on the Daily Exchange video (sectorexchange.com) I discussed some of the issues we see in the various sectors and how they are setting up. I am adding some of these to the Watch List to play on the short side and some to play on the long side. Yes, you can do both. The market is not a perfect world and unless you haven’t noticed not all stocks go up in unison with the broad markets.

Two  key developments worth watching are interest rates and the dollar. First, looking at the dollar we saw a significant technical development yesterday as the dollar broke higher and through resistance. As you can see on the chart below this is significant for the dollar, but the ripple effect has to be considered as well. Inflation, for one, will be held at bay longer as we import less inflation (my view, a plus longer term). It will impact exports as it cost more to buy U.S. goods. (side note – we are an import nation thus stronger dollar is a plus.)

Dollar Index

Second, the move in interest rates yesterday shows the pressure on yields to move higher in anticipation of the Feds ultimate action. However, the move yesterday was in part prompted by the 5 year Treasury auction not going so well. This is somewhat in response to the debt being piled up on behalf of the American taxpayer. While the true impact is to only 51% of the country (those who pay taxes) it is enough raise concern in the credit markets short term. The chart below shows the yield on the 10 year Treasury Bond and you can see the break from the consolidation. If this were a stock we would be ready to buy! However, it is the cost of money it is negative for the price of bonds. Thus, our attempt to buy TBT again. The ripple effect here is to the economy. The housing market will be impacted by higher finance costs for homes. Businesses who can get loans are impacted as it hits them on the cost of borrowing. This is why the Fed is trying to keep rates low, an attempt to not stall the economic recovery which is fragile at best.

It is important to watch both of these issues and make note of the impact they can and will have if the trend continues. Making yourself aware of potential outcomes prevents the shock and awe effect. It also allows you to adjust your stops and manage your risk in sectors with potential impact.

Stay focused on your goals and manage the risk of the market.



Disclosure: looking for a break from the consolidation for entry