Yesterday saw the reversal of two major trends of the past few weeks. Stock markets fell and the dollar started going up. Today the dollar is up some more, rallying hard against the euro and the pound.
But it won’t last long. Nothing has changed to bring about that. It’s more likely that these two trends are just pausing for breath.
Just taking a breather
And who can blame these trends for taking a breather? Stocks have been marching upwards now since the beginning of March. The benchmark American index, the Dow Jones Industrial Average has moved up 42% in that time. The broader S&P index of the top 500 US stocks is up 33%. And here in London, the FTSE 100 has been doing a great job of keeping up, with a rise of 29%.
And while stocks have been going up, there’s been another one-way trend in place…
The other major trend has been in the US dollar, which has been marching downwards since the beginning of March.
We’ve looked at the Dollar Index in recent weeks. That’s a weighted basket of six major currencies versus the dollar. So rather than just tracking the greenback against the euro or against the pound, the Dollar Index gives a broader view of how the dollar has been doing generally.
And as we’ve seen, the dollar’s been battered. Here’s that Dollar Index chart once more... up to date.
Right below the dollar chart, is a chart of the US S&P 500 stock market index. I'll get to that in a moment, as it’s crucial to the point. I just wanted to put one above the other so they are easier to compare.
There are two horizontal lines I’ve added to this. The top green one marks the level where the dollar fell through its 200-day moving average at 83 on 8 May. That’s an important level to watch. Since the Dollar Index fell through it, that 83 line is now acting as “resistance”. What we mean is that it’s a technical level where dollar bears outnumber the bulls. After the index initially fell through 83, it had a go at rising back above it a few sessions later. But it failed and the index plummeted all the way to 78.5, marked by the horizontal red line.
What we saw yesterday was a bounce off this fairly obvious looking “support” level at 78.5. Support is the opposite of resistance – a level where the bulls start buying and outnumbering the bears. I guess they just thought the dollar was oversold. Given that the index had bounced nicely from 78.5 back on 17 December last year, traders bought the dollar yesterday. That’s the way traders work. Whether this will last remains to be seen…
What’s clear to see is how the dollar has been behaving in relation to stocks. As the dollar has fallen, the stock market has been rallying, or vice versa. When you see the S&P500 chart right alongside the Dollar chart, it’s dead easy to see. Not quite a mirror image... but a pretty clear inverse relationship.
The stock market rally is not over
The dollar peaked out at the beginning of March, just when stocks bottomed out. Ever since then, stocks marched higher, the dollar marched lower.
But yesterday, stock markets wobbled. The S&P 500 finished 1.4% lower. The Dow was down 142 points at its lowest. Meanwhile, the dollar roared higher.
It's the flight to “quality” or perceived safety. No matter how much the dollar looks like it's in trouble, it's still the number one currency in the world. That’s because the US is still the biggest economy in the world, the one people have the most faith in. When investors panic, they rush into dollars, typically by buying US government bonds. And so the dollar rallies.
How long will it last? Probably not long. OK there was some pretty negative jobs data out from the US yesterday. And there was a worse-than-expected contraction in the manufacturing industry, too. But nothing that looks bad enough to derail this stock market rally yet.
So after perhaps a couple of days counter-trend action, expect the established trends to reassert themselves: stocks up, dollar down. What we’re being handed is just a better chance to get in to these trends.
And that will mean more upward moves for gold, which is heading towards $1000, despite yesterday’s dollar rally hitting it hard. And it could mean more upward moves for silver, which could easily reach $19 and even $21 in fairly short order if the dollar comes off hard.
Use this counter trend as your chance to get into commodities for the next leg higher.
Best wishes,
Frank Hemsley
For The Right Side
Tech stocks boosted by Government drive
BY SHIVVY ARORA
Bill Gates sees technological innovation as the ‘key driver’ of a global recovery. The UK Government seems to agree. Since the start of the year, it’s declared the IT industry as one of the critical sectors that could lead the British economy out of recession.
You can see this in the stock market, too. Technology stocks have been a star performer this year. Take a look at the chart below which tracks the performance of the FTSE 350 Technology index for the year-to-date.
The sector has risen 52% since the start of 2009, compared to a 1% fall for the FTSE 100. Technology features prominently in the Government’s ‘kickstart-the-economy’ plan. The focus on creating public sector jobs in light of mass unemployment also involves a large amount of training and IT resources.
The FTSE 350 Tech Index is on a strong upswing this year 
Source: Yahoo finance
Our Government spends close to £14 bn a year procuring IT services. And this figure could go up. Just last month, Skills Secretary John Denham announced that companies winning public contracts are required to invest in technology and training.
Denham says if we don’t invest in IT now, we’ll face problems when the economy starts to grow again. It seems the Government is putting its money where its mouth is – its expanding Technology Strategy Board (TSB) is working hard to grow business investment in technology.
Government support for technology and innovation is likely to keep the sector buoyant and in business. The new tech rally could be just beginning.
Editor’s recommendation: If you’re looking for an exciting way to play the impetus behind technology, then consider Red Hot Penny Shares. The portfolio is full of exciting tech plays right now – and you can still get in for possible huge gains. Click here to learn more.
Note: Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Please seek independent financial advice if necessary.
The Daily Reckoning – America’s great big bluff
BY BILL BONNER
London, England
Thursday, 4 June 2009
Angela is a genius. Tim is a schmuck. That’s what we took away from yesterday’s news.
As near as we can make out, Tim Geithner’s trip to Beijing was, at best, a draw. He told his soothing lies. China listened. The markets reacted favourably.
Stocks fell... with the Dow down 99 points. Gold was down too – $18. And oil lost $2, to close at $66.
But the dollar went up – to $1.41 per euro.
His goal was to bluff and bamboozle the world’s investors – notably China – into believing that the US had its finances under control. Once we’re out of this mess, he told China’s top man, we’re going straight. No more binges of EZ credit and wild government spending. We just need a little more of that old time medicine... just one more time... to get us through this dark night of economic downturn. But once the sun comes up and the economy is back on the road to recovery, trust me on this, America is going to balance its budget, foreswear Quantitative Easing forever, and join AA. No kidding. Cross your heart and hope to die.
But some habits are hard to break. The habit of getting something for nothing is one of them. Spending money someone else earned is like eating a big slice of Black Forest cake and watching someone across the table get fat. You’re likely to ask for seconds.
Americans are in the habit of spending huge amounts of money – with no intention of ever paying it back. Consumers did it in the ‘09s and ‘00s. Now the feds are doing it. The federal deficit for this year alone is four times last year’s record. The official US debt is exploding. Bill Gross says it will be 100% of US GDP within 5 years. Our guess is that it will reach that level even sooner.
At 100% of GDP... even mainstream economists believe the situation will be irreversible... interest payments will be more than the US can afford. At that point, forced to borrow more and more just to keep up with the interest, the system will go into a Ponzi-scheme endgame.
“Our expectation is the government won’t be able to exit” from its deficit spending positions, said Gross in an interview on Bloomberg Radio. The programs “will be semi-permanent positions on their balance sheets.”
Once you go down that road, it’s hard – maybe impossible – to come back. The US won’t be able to pay off its debt... and it won’t be able to unload GM. Nor will the Federal Reserve be able to sell its holding of bonds onto the open market – without causing yields to rise.
Even Ben Bernanke says that “long-term deficits threaten the financial stability” of the nation.
As we’ve pointed out many times, the problem is more political than financial. The bums in Washington could still straighten up – if they wanted to. We’ve already told them how they could bring the deficits and the economic downturn under control. But they’re not about to take our suggestions. Instead, they’re “gonna have fun, fun, fun until Daddy takes the T-bird away... ”
Daddy China, that is. The Middle Kingdom. The Red Menace. Now, the leader of the bond vigilantes.
Remember the bond vingilantes?
Read on…
To read the Daily Reckoning in full, click here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
