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Look Out Below

      Last night Australia and India raised interest rates again. Over the past few months, China, Brazil, Canada, Korea, New Zealand, Sweden, and Singapore have all raised their rates. In contrast, the Federal Reserve has lowered rates and will announce their plan to do so again on Wednesday. With commodities making new long-term highs, such as cotton, which has the highest price since the Civil War, inflation is apparent to everyone other than the Fed. The Treasury sold $10 billion of five-year TIPS at a negative yield of -0.55. None of these statistics are factors you want in a market you are investing in. 
     And now, with 10-year yields starting to rise, it appears that the Fed has pushed the market as high as it can go. The S&P 500 is stalling trying to make new highs on decreasing volume, the US Dollar ($DXY) has formed a base, and the volatility index ($VIX.X) is rising. The US Dollar ETF (NYSEARCA:UUP) is forming a base at its -2 1-year standard deviation channel, $SPX is topping out at its +1 1-year SDC, and $VIX is starting to rise from its -1 1-year SDC. This is not an environment to take new long positions. 
     The dollar debasement has driven US and foreign markets higher since Bernanke's declaration of intent to 'raise inflation' at Jackson Hole on August 27th. Foreign markets have a very strong inverse correlation with the US Dollar, and when it starts to rise soon after QE2 disappoints, look out below not only in US equities but foreign equities as well. I will post charts of some of these correlations again tonight, but the main point to take from this is if I were long currently, which I am not, I would at least buy puts on all my positions. The market cannot sustain this rate of progress, and when the election and QE2 is off the table, this market has a long way down in a long-overdue correction. 

Disclosure: Long SH