Saturday, May 26, 2012

Are we to blame Nixon?

The Fundamental forces driving this market higher for the short term is partly due to the expectation of QE3. Ben Bernanke will ultimately prime the printing pump again, but only after we see the selling pressure intensify.

There is still plenty more downside left of this market, which is why I'm telling you not to believe this current rally. It is simply a contra-trend within a larger decline, but only for the intermediate term.

What do I mean by that? While there are those per-ma bears who feel we are doomed for a deflationary environment, and on this basis, prices will likely head south to retest the march 09' lows. Folks, there is still plenty of evidence that suggests this is only a mild correction within a larger bull market.

Here are several things to consider....

Ever since President Richard Nixon eliminated the gold standard, the value of money is determined by a basket of currencies. This means the value of our dollar is at the mercy of central banks, and believe me, their priorities are to pay back sovereign nations with cheaper money. This will alleviate them from their enormous debt obligation, but also achieving something much worse- destroy the purchasing power of your bottom line wealth.

The Federal Reserve has made it clear that they will do whatever it takes to avoid another 08' collapse, and now more than ever are firewalls in place to prevent such from happening.

Think about it.  For the past year the Market has been masking several dramatic developments that could have, and should have led to catastrophic consequences.  They were- the bankruptcy of M.F. Global, J.P. Morgan's announcement of a $2 billion dollar loss on risky credit derivative bets, and the growing magnitude of Europe's economic contraction.  Yet the market shrugged it off like a bad case of flees.

And I should also mention that only a handful of Market Indices in the entire world have managed to decisively clear above their previous 2011 highs. I'll give you a hint, they all trade in the United States. Why do you think that is?

You see, the U.S. dollar still holds the World Reserve Currency status, and by default, is considered a safe haven to other international currencies. For this reason, citizens of Europe have been taking money out of their home land (real estate, banks, European stock market, etc.) only to re-allocate these funds where the return on investment has a more promising outlook.

We are beginning to see the early stages of this process come into fruition. However, the question that remains is where exactly will all this money go? It can't all go into the Dollar, nor can it all go into gold. It will spread throughout every asset class of the Stock Market , and consequently, re-inflate stocks and commodities to new all time highs.

 S&P 500 v. U.S. Dollar

S&P 500- Daily Chart

Silver- Daily Chart

The U.S. Dollar- Daily Chart

Gold- Weekly Chart

 GDX- Weekly Chart

Wednesday, May 2, 2012

The striking similarities upon us

I have this growing suspicion that many of you are making the subtle transition to a potential bullish outlook for the stock market. I'll need a minute or two of your time so that I can King Kong all of that nonsense.

If I must say, last week was full of distractions. Obviously the first, Apple's remarkable quarter was a surprise to many, especially given the five day sell-off prior to the actual news release. This outcome provided investors with relief, and the reassurance of knowing this bellwether did not actually stumble, but instead just underwent a retracement. Unfortunately, the leaders of the stock market, including Apple, have yet to clear their previous highs. This I can tell you has done very little to generate much renewed confidence among investors.

The second was of course, Mr. Ben Bernanke. It's unfortunate that investors still to this day are hoping for his long awaited bailout package. Folks, expecting this announcement prior to a sharp decline is nothing short of wishful thinking. QE3, or lets say another currency swap, will only occur during or after a liquidation process out of all asset classes of the stock market. At the moment, there is not enough political pressure on him to push the button especially since the market has generated a near thirty percent gain from the October lows.

Thirdly, the dismal GDP figures were released the morning after Spain's credit rating was downgraded to BBB+. At the exact timing of this actual data, the dollar took a plunge. It was a classic example of the inner workings of our government bond buying program on stand-by. The "plunge protection team" will manipulate the dollar lower in the face of a game-changing event that has negative consequences. This is done in effort to create a soft landing in stocks, but it cannot delay the inevitable correction coming. You see, the government can hold up the market with Operation Twist, but it does not have the ability to change the current trend of the market.

While the Dow Industrials reasserted its underlying strength by clearing above its previous minor high, the remaining market averages are telling us differently. Usually the first week of every month is the time when money managers allocate their clients fixed income into dividend growth stocks. This explains the money inflows into the utility sector and for the same reason that twenty nine out of thirty Dow stocks closed mildly positive in yesterday's session.

Utility Sector V. The Dow Industrials

The Dow Industrials- Daily Chart

The Russell 2000 Index- Daily Chart

The S&P 500- Daily Chart

Have a great day,