Short Term Timing

The Dollar is Falling!

The dollar is falling… the dollar is falling!

That’s what I noticed today as the dollar index fell 0.59% (that’s big in the currency world).

It’s a big deal because a falling dollar has usually led to gains in equities. But this time the market ended the day mixed. The Dow Jones was up 0.43% and the S&P climbed 0.23%. The Nasdaq stuck out like a sore thumb, falling 0.21%. It seems that the old dollar/stock market pattern isn’t holding up as well as it used to.

This indicates to me that the dollar carry trade is losing some of its luster. In the end, these ultra-low interest rates probably won’t last forever.  I expect the dollar carry trade to be replaced with the Yen carry trade (since Japan apparently doesn’t believe in higher interest rates). The new Bank of Japan governor has also shown a preference for a weaker currency. So moving forward, we should see a big correlation between the Yen and the US stock market.

As you can expect from a falling buck, gold was on the up and up, gaining $14 to close at $1,151 an ounce.

Honestly, though, I wouldn’t read too much into a falling dollar. The market has been data driven as of late. Investors are all looking for signs that the recession is truly over. And as long as this week’s reports show an improving economy, the market could head higher, taking the US dollar along for the ride.

The report I’m most interested in is the December Consumer Price Index report this Friday. This report measures inflation at the consumer level. If this report shows a big bump in consumer prices, the market could easily sell-off. That’s because higher inflation means the Fed is more likely to boost interest rates.

And higher interest rates signal an end to cheap money.

Will the CPI come in very high? I doubt it. Gas prices were close to flat in December. And at the same time, retailers were discounting everything. So I wouldn’t be shocked if CPI came in at or under consensus (0.0%-0.1% gain).

At this point I’m cautiously bullish, especially on the commodity complex.

A Thought on the Dollar Carry Trade…

Why is the stock market not plummeting while the US dollar index gets stronger?

Well, maybe it’s because the dollar carry trade is being replaced by the Yen carry trade?

Since November 30 the Yen rose from 86.28 to 89.86 to the dollar. At the same time, the US dollar index jumped from 74.50 to 77.09.

So the charts confirm my suspicion. It also means that the dollar can move higher without affecting the stock market much.

The move to the Yen is justified since Japan is suffering deflation and will keep interest rates low for a really, really long time. And by this time next year, US rates will probably be higher.

Is 10,500 STILL a No Go?

Last week I wrote about how the Dow Jones couldn’t stick at 10,500.

Well, nothing has changed this week.

This is what I think is going on…

This is a 3-year weekly chart of the Dow Jones. And it shows that since October of 2007, the Dow Jones has been in a pretty nasty bear market.

More importantly,  the Dow Jones is now at that bear market trend line. Will it break above it? That’s hard to say. But there are some other interesting things going on.

For example, the US Dollar Index is trending higher. I mentioned last week how the buck had broken above its 50-day moving average. Interestingly enough, even though the dollar is trending higher, the stock market has maintained its highs.

Sure, it’s not making new highs. But I expected to see more of a correction by now. Maybe a plunge under 10,000?

Of course, a strengthening dollar could actually lead a falling stock market. But why is it taking this long? After all, the dollar/stock relationship had been pretty tight over the last year.

It’s one of those questions I can only guess on. Maybe funds are moving to cash at the end of the year? (My main thought.) Or maybe the dollar carry trade isn’t as big as everyone thinks? Or possibly the dollar hasn’t strengthened enough to cause carry traders to sell?

It’s all just guesses at this point.

Taking a look at the US indexes on a shorter-term time frame, they are all pretty much overbought. I’d put my money on a reversal; with a tight stop set at around 10,550 on the Dow Jones.

This would strictly be a small money bet. None of the major indexes have broken under their 20 or 50-day moving averages. This would be more like insurance.

Fundamentally, there are still some things this recovery hasn’t proven yet. Like, will there be follow through? Consumers are up to their neck in debt. Credit lines are being shut. And a lot of money is spent on servicing debt.

I also think that people are beginning to shun debt. In a credit driven economy, debt is money. So less debt means less money. That’s deflation my friend.

I’m not sure how consumers could keep this economy humming along. If they do, it will be what John Mauldin likes to call a “statistical recovery” and nothing more.

With that in mind I think next year will be a flat year in the market. I mean, do you really expect this year’s momentum to continue? Stimulus is going to fade slowly. Tax credits are going to expire. And the government is going to tighten its budget.

That’s not exactly a good environment for growth.

Now you understand why I feel placing a little bit of insurance on the portfolio would be a good thing to do. Get into a put option, or short something. Just make sure it’s a small percentage of your overall portfolio.

Don’t go off and use 95% of your funds to insure your portfolio. That’s just stupid.

If the market falls, well, your portfolio is buffered somewhat until you can change things up. If the market doesn’t fall, just be glad you didn’t have to use your insurance.

Get it?

Good

The Trend is Your Friend

Listen, I don’t know how many times I have to repeat that the trend is your friend.

I mean seriously, have a beer with the trend. Talk with the trend. Don’t try and punch it in the face. The trend is stronger than you are. And it WILL smash your face in if you’re not careful.

While bears were out celebrating a stronger dollar and trying to spit in the trend’s face, the trend came back and hunted them down with a machine gun from a helicopter flying overhead.

If I recall correctly (and I do, because my blog tells me so) two days ago I told you to be careful about calling the recent 3-day rout another bear market.

And today, just like that, the Dow popped right back above its 20-day moving average.

Not only that, but the RSI is heading higher (forming an uptrend even) and the Slow Stochastic is nearly crossing over and heading higher as well.

That’s not all though. If you look at the dollar index, the buck is clearly overbought. And today, it was practically unchanged. I wouldn’t be shocked to see the dollar decline over the next few days.

If you’re bold, you might want to start buying.

If you’re a little more on the safe side, then wait for the dollar index to get back under its 50-day moving average before jumping into the market. At the very least, pay attention to the S&P 500 and make sure it gets above its 20-day moving average.

Oh what the hell. I’ll probably tell you as soon as it happens anyways.

What does the dollar rally mean to investors?

When I used to date (before I got engaged), I never tried to kiss a girl unless she confirmed her interest in me.

A first date was never enough. People date all the time and it leads nowhere.

But if the girl was fiddling with her hair, touching my arms and telling me how I was a “strong and powerful Puerto Rican”, well, I would definitely kiss her by the end of the date.

Other guys I know aren’t as conservative. They try and kiss a girl whether she shows interest or not.

These are the same guys that spend money that they don’t yet have. Or that put all of their money on one big bet. And the same ones that try and predict tops and bottoms before they ever happen.

Their success in the stock market – as with the ladies – was limited.

I guess you can say I’m on the safer side of things. I like to wait for confirmation before I act. With the girls, as I explained above, I like them to show an interest in me. I don’t like to spend money I’m not holding in my hand. And I definitely don’t try and pick tops and bottoms in the market before they happen.

Rather, I ride out the trends and look for predictable buying or selling opportunities to take advantage.

In yesterday’s issue, I told you that I wouldn’t become a bear until the 50-day moving average was breached on the major indexes.

One thing I didn’t cover though was the dollar.

Careful observers have noted that the buck is now above its 50-day moving average. On Friday, I explained the relationship between the dollar and the stock market. Suffice it to say, a rallying dollar is bearish for the stock market.

But just because the buck is above its 50-day doesn’t mean I’ve become a bear. As I said before, I like to see confirmation first. In this case, confirmation would only happen if the major indexes drop under their 50-day moving averages (10,076 on the Dow Jones).

In the end, you have to stay realistic. Don’t let ideology drive your actions in the stock market. Instead let the market guide you.

Even though the dollar broke through a major resistance point, the trend is still up for the stock market.

Act accordingly.

The Bear Market We’ve All Been Waiting For?

Bears are dancing in the streets, biting the heads off of random bulls they see.

The Dow Jones, Nasdaq, and S&P all broke under the 20-day moving average. The 50-day is in the line of sight. Will all three indexes plunge below the 50-day? I may not have a crystal ball, but I do have technical analysis.

Dow Jones Industrial Average

This is what the chart is telling me right now

• The Dow Jones saw significant resistance at 10,500. It even tried six times to break above 10,500 with no success.
• Huge spike in buying volume followed by selling might indicate a blow-off top.
• The RSI and Slow Stochastic are both in neutral territory. This signals more downside left (I’d like to see these two oversold before buying).
• The Dow broke under its 20-day average but is still above its 50-day.

It looks like we might have a few more days of selling. But I expect buyers to come back in as soon as the major averages hit their 50-day moving averages. If we see a decisive break UNDER this average, it could signal a change in trend.

In other words, buying now might be a bit silly. But getting heavily short right now is equally as silly. It’s kind of like betting against the Yankee’s in the first inning because the Red Sox barely hit a home run. It’s just too soon to make that bet.

In times like these, you want to use these small downturns to hedge your portfolio.

Yesterday I recommended you get into January VIX out of the money call options to hedge your portfolio. If you had done what I said, you would probably be in the green (the VIX is up over 6% today!).

Until the trend becomes bearish, I simply won’t get heavily short this market. And that won’t happen until the 50-day is breached on all three indexes.

Another day… another failed rally

Let’s give a warm round of applause to Ben Bernanke for opening his big fat mouth (hey, this reminds me of when he first became Fed chairman!) and killing the market rally today!

In a speech Ben gave today, he told us what we already knew: that the US expansion would be slow and that there were significant headwinds ahead. Why this shocked the market into a decline is anyone’s guess. After all, the market is supposed to be efficient. And it should have priced this in already.

It obviously didn’t (another loss for the efficient market corner).

You can get a transcript of Ben’s talk here: http://www.ritholtz.com/blog/2009/12/chairman-ben-s-bernankes-frequently-asked-questions/

In the meantime, we have to determine what this means to the stock market and most importantly, to our own portfolio.

With Ben saying that inflation will drop, investors got out of risk (commodities, emerging markets, and US stocks) and into treasuries and the dollar. The yield on two-year treasuries alone dropped 7 basis points today (0.07%) and the buck rose 0.3% against the Euro.

This, of course, is the second straight day of dollar gains (Read Friday’s post to see what I said about it then). And if you’ve followed my writing for some time, you know that I’m expecting a dollar rally in the next few months. But whether what we’re seeing today will transpire into the dollar rally I’m looking for isn’t clear.

The Dow, S&P, and Nasdaq are all above the 20-day moving average. If that support line fails, I expect to see support at the 50-day averages. If we see the markets penetrate the 50-day, then i’ll take my ramming bull horns off and put on a stinky bear outfit and go hibernate.

If you’re heavily long, you should probably put on a little hedge by buying an out of the money January call option on the VIX.

Want to Bet Against Wall Street?

If you’re a boxer, the first thing you have to learn is how to bob and weave. You have to avoid punches and punch back at the right times if you want to survive out in the ring.

Other forms of martial arts fighting, like tai chi, focuses on using your opponents energy against himself. A person who fights tai chi doesn’t just swing like a drunk Puerto Rican in the Bronx. He sits back and actually waits for the drunk Puerto Rican to rush him… then he quickly gets out of the way and pushes the drunk bastard down to the ground… kicking him while he’s down.

So if you want to make money on Wall Street, I propose you use the crowd to your advantage by betting against them. Some people call it being a contrarian. Others call it having balls. Whatever you want to call it, I’m going to show you one way to be a contrarian right now.

Check out this news clip from Bloomberg…

Trading of options on the benchmark index for U.S. equity derivatives surged to a record in a bet that the so-called VIX may decline in the next two months.

“It looks like they’re trying to short the VIX in January and February,” said Dan Deming, a VIX options trader at Stutland Equities LLC in Chicago. “They’re selling the call spreads so that would indicate they think it’s going to be under pressure.”

More than 634,000 calls to buy futures on the VIX, as the Chicago Board Options Exchange Volatility Index is known, traded today, six times the four-week average. Eighty-seven percent of those contracts changed hands as part of two spread trades, according to data compiled by Bloomberg. The calls were probably sold, meaning traders were betting the VIX would decline, Deming said.

Now, over the longer-term I think the VIX is going down. So these smart asses selling calls are probably going to make some cash doing so. But there is a risk that the VIX pops up to 30 in the next 3-5 day sell-off which could happen at any time.

In fact, I’m pretty sure it’s going to happen either late this month or in early January.

Early January is more suspect because banks will be forced to put some junk assets back on the balance sheets as FAS 167 comes into effect. In other words, banks will have to use market value to price these assets and may lose a few billion in the process.

Plus, we should see lower consumer spending in January as jobless, cash-strapped individuals with maxed out credit cards try and pay off their newly acquired debt.

That’s going to act as a drag on retailers and probably spike the number of layoffs that happen after the holidays.

In the end, it’s likely that we see a big sell-off in the next few weeks. And when it happens, these VIX call sellers will turn into buyers and push the value of VIX calls through the roof.

I know what side I’d rather be on.

This Chart of the Dow Shows Opportunity…

I woke up this morning… grabbed a cup of coffee… and sat down at my computer looking through charts.

Most of what I saw was ridiculous crap. Stuff not even worth mentioning (expect to say that they sucked)

But then this GEM popped out at me…

Dow Jones Chart

This is a 15-minute chart of the Dow Jones.

Notice that 200-unit resistance that has proved quite resiliant. Well, if the Dow can hold its 8,000 support and break above this 200-unit average, then the Dow is rallying.

I really like the fact that neither the RSI or Slow Stochastic are anywhere near overbought. That means the fuel is there for a move much higher…

Hmm… There’s a great credit-spread one can do : )

Charles Delvalle Here…

Hey Everyone,

Charles Delvalle, here.

You might remember me from Financial Goodness blog and from reading me regularly in Investor’s Daily Edge.

This is my new blog.

And because it is simply a new blog that I put up in about two hours time, it looks a tad “rough around the edges”.

Be assured this, just like the final days of George Bush’s Presidency, will soon come to pass. I have some big ideas for how to take this blog to the next level. And I welcome any input or comments from anyone letting me know their thoughts on getting there.

In other words, what do you want to see on this blog when you come everyday? What do you want to learn? How do you want it presented?

I can be a sarcastic ass from time to time, but the truth is that’s not going to change.

And right now, i’m a pessimist. Because i think this stock market downturn has a lot further to go. But i don’t want you to confuse my longer term outlook with my short term one.

Just because i think stocks have further to fall, doesn’t mean i think it’s going to happen come Monday… or Friday, or even the week after that.

I use technical indicators to give me an educated guess as to how the market will move in the short term. For the long term, i look into over reaching trends in the financial world.

This is what i know, that you, dear reader, may not be aware of…

- Banks will cut back Credit Card balances by Over $2 trillion next year. This at a time when the US consumer is relying more on credit cards just to pay the bills.

- The commercial real estate market is starting to see more losses. It was a profit party there too as regulation and prudence got thrown by the wayside.

- More hedge funds and corporations will go bankrupt next year then we’ve seen in a long time. This will add to the jobless numbers quite significantly. Not to mention all the liquidity that will get squeezed out of the system.

See why i’m so pessimistic? Just because the government saved GM today doesn’t mean that GM won’t continue to layoff nearly as many workers as it would have had it gone bankrupt. All it means are that the job losses will be spread out over a few years and not all at once. Therefore, the impact isn’t as strong, but it lasts a lot longer.

Kinda like taking cold medicine. Your symptoms last longer, they’re just not as bad.

With all of this in mind, i feel that next year might only be slightly better then this year, but overall it should still be bad.

People just have way too much debt that they need to pay off.

But you should know that the seeds of a new “bubble” are certainly being sown today. Ultra low interest rates and a flood of new money will be sure it happens.

Some say the new bubble is US Treasuries. But that makes me wonder what are people considering bubbles? It would seem to me that a bubble takes place over a long period of time. The real estate bubble didn’t take a year, it took a few. And so did the internet and commodity bubbles.

But US Treasuries? The dollar is in a long-term downtrend. I don’t see how there could be a bubble there. All there is is short-term panic. And the panic should come in waves throughout the next year.

Once the panic subsides, treasuries will drop. Doesn’t seem like a bubble to me.

But alternative energy… That, I feel, will be the next big bubble. And it will be fueled by at least four years of positive government help, too.

I’l talk a little more about that next time.

-CD

P.S. I have some big ideas for how to take this blog to the next level. And I welcome any input or comments from anyone letting me know their thoughts on getting there. In other words, what do you want to see on this blog when you come everyday? What do you want to learn? How do you want it presented? Comment below.