Will the real market please stand up? We have a situation where the U.S. dollar is making new highs but oil, gold, silver, selected commodities and the stock market have also been challenging highs. The market is always right, but this picture isn’t right.
When we see markets behave in a manner we are not used to seeing we have to figure out what it is trying to tell us. First of all, either end of the inverse relationship is stretching the rubber band here and we’ll find out which one it is in short order. Another possibility is one end of this inverse relationship is in a larger degree triangle or sideways pattern and it is a coincidence they are meeting at the top end of the range.
The other possibility really is the Great Recession is coming to an end. I don’t have to look any further than my good friends from Australia to get a textbook case of economy growing wealth by increasing the value of the stock market along with their currency. If our stock market has really broken its leash with the U.S. dollar it would mean it no longer fears deflation and the debt balloon sitting about the 38% retracement near the twin peaks at the 90 price handle. It would mean the Fed has done a wonderful job of juggling the balance sheet and the TARP money really being used wisely.
I saw an infomercial over the weekend for a massive bank owned real estate auction. Homes in Phoenix that were valued at 350-450k at the peak had initial asking prices of just $89k. Does that mean enough people are no longer in debt over their heads where they won’t have to pay back loans obtained with easy Greenbacks (2004-07)? Banks appear ready to release inventories all over the country. New buyers do have to qualify for financing. Gee, they actually have to prove their income, what a concept!
Should we really believe all of this? We are going to find out starting this week.
First of all, these important charts are sitting at important time windows. The dollar set a new price high in the 61st day off the bottom. Oil just completed a 261 day window but is bumping up against important median channel resistance. The subject of last week’s column was the 261 day window in the oil market. Oil had a great week and has reached the inflection point. If it breaks higher chances are really good the seasonal low is in place. But it could also be a case of stretching the rubber band as far as it can go.
The SPX hit the 61% retracement of the move down as has the NDX. The NDX is hitting median resistance as well (see chart below). So we have oil, stocks and the dollar at important resistance. What would it mean IF THEY ALL DROPPED?
If you didn’t have enough, the banking index is also sitting at 61% of its move down from the January high as well. It is also at a vulnerable point on the chart and we’ll have to see how hard it can get hit. I put my internal x-ray calculations on the SOX and the BKX and it appears now the banks have a better chance of falling than the semiconductors. It’s not by a wide margin but the banks are out of room compared to overhead resistance compared to the semis. That means the banks have the potential to lead to the downside.
But in reality things are so close that it is almost too close to call. How did we get to this point?
On Thursday, the sneaky Fed followed through on their promise to start cleaning up the balance sheet by taking the first baby step in raising the discount rate. At this point markets were already at resistance levels and the dollar sitting at a virtual triple top. Before we go any further, we need to digress.
How about that dollar? Its stock is rising just as fast as the fortunes of the U.S. Olympic team. At the high in early February it gave us a bunch of internal readings strong enough to sink many a market. But the best it could do was give us a mild eight-day pullback. Of course, I told you the worst case scenario was an intermediate pullback as the longer term median lines were dominating the action. That forecast has kept us on the right side of this market for 3 months already. So the fact we could have such a good reading and just a pause means this chart is strong, really strong.
It’s not going to get much weaker from here either because my best readings come off the January 13th low as opposed to the November bottom. That means even if prices do come off the high, the larger probability is another smaller degree pullback as opposed to outright reversal.
The best part of Thursday’s action materialized after the regular market closed. The stock market dropped like a rock. If there was ever a chance for this rally to be over, it was Thursday night. Sometimes it’s not what happens as what doesn’t happen that counts the most. By Friday morning, it was a case of no harm, no foul. Those of you looking for the big drop, bears let a big chance slip through their fingers. As you know it’s the technicals that ALWAYS drive the price action and I also like to see the technical reaction to a news event. If markets couldn’t drop now, that is significant. If markets can’t drop at this resistance level, that is significant. As opposed to some other analysts that are predicting big drops, I’m looking at the behavior of the price action at this important resistance level. If it’s going to collapse, this is the place for it. If it can’t or won’t, then the market is playing its hand and you need to go with the flow.