Wednesday, October 28, 2009

Fourth Day of Dollar Bounce Weighs On Stocks

The chart above shows the US dollar etf (UUP), which tracks the direction of the dollar relative to a basket of other currencies. You can see the long slide that the dollar has endured, but this has coincided with a rise in the stock market.

For the last four days, the dollar has been bouncing, and that has weighed on stocks, hitting the energy and materials sectors especially hard. It may seem counter-intuitive, but in this environment stocks rally on the weak dollar and pullback when the dollar is rising.

You can see that this recent bounce has been accompanied by a huge surge in volume, indicating that investors are betting that this latest move has some legs to it. I am less certain, and think that the dollar will likely run into resistance again and continue its slow slide.

This morning, the durable goods report came in a little better than expected, but the new home sales data was below expectations. I have commented recently about the lumpiness of the home sales data, and today is an example. I also put a little more weight in existing home sales vs. new home sales.

The stronger dollar is weighing on commodities, with oil prices down near $78 and gold flat around $1034. Asian markets were lower overnight; the 10-year yield is lower to 3.46%; and the VIX is +5.6% higher today, extending its recent rise to 26.25.

Trading comment: The S&P 500 is lower for its fourth straight day, and this morning touched its 50-day average at 1050. This coincides with an oversold reading in the oscillators, at the same time we are approaching month end. I think there is a good chance we could see a bounce from here, as investors step in at the 50-day average and also put money to work (window dressing) ahead of month end.

long SSO


At 7:12 PM, Blogger michaeld said...

I was expecting dollar strength this week, as it should strengthen against the Euro over the next months, but likely lose against the BRIC currencies.

It all has to do with interest rate differentials and relative economic growth.

It will likely continue to impact the stock market every once in a while when short covering occurs.

But no matter what direction the market goes, an investor can always profit both from the upside and the downside just by using timing signals. They tell you when to enter and when to exit the market.


Its DJIA index timing signal is up 62% this year and it is free of charge to individual investors.


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