Dollar breaks down again, in big trouble

The Greenback is in big trouble. It broke down yet again. On the 1st it looked like we had a good low and it started to come off the low. Not only did the bounce fail, the test of the low failed and now the near term channel lines failed as well. Three strikes and you are out! Long time followers to our work know we’ve outlined this time period as key to the whole year. It’s June and we are 120 months into a 121 month square out off the top from a decade ago. Does the turmoil going on right now surprise me? Let me put it to you this way, I’d be surprised if this wasn’t happening. What should be concerning to everyone is the fact the Greenback fell along with the market to close the week.

What does that tell you? We may have finally reached the point where the lower Greenback no longer benefits the recovery. Why is that? Simply put, our creditors are finally starting to get hurt by being repaid with weaker Dollars. See, everyone is so absorbed and focused on the debt ceiling. That’s not the problem. The problem is we’ve inflated away our debt to the point that creditors like China are being paid back by cheap Dollars. I have no doubt they’ll work out an arrangement to get debt ceiling worked out. These politicians are not that dumb, are they? But the SSE manages to stay a step ahead. I’m not so sure about China. It was another tough week for China but it managed to end the week on a positive note. But I’m not convinced the low is in. I’m going to remain very suspicious of the commodity trade until the SSE bottoms and we are not even close to confirming anything like that. So while the Dollar represents the anti-commodity/risk/inflation trade it couldn’t even get going while the SSE was slipping near the cliff. The bottom line here is we’ve been bearish China simply because the chart wouldn’t improve and the psychology about their recession remains in denial.

That brings us to the psychology on our side of the planet.

The new word of the week is "Transitory." That was word to describe the sour jobs report. Yes, the economists missed it again. It seems to me they do well in forecasting the number when the stock market is going up but when the market is going down they couldn’t hit the ocean if they were standing on the pier. The nonfarm payrolls was+54,000 where they expected 160,000. That was accompanied by a screaming headline "Soft Patch? Economy Looks Like It’s In For Worse?" They initially blamed the number on the weather, tornados, Japan or anything to suggest it’s temporary. It was Simon Hobbs, who caught on to the fact the economy is deteriorating faster than anyone thought. Good for him, Mark Haines’ chair is in good hands. But Friday was mostly a weak day because this is just another form of the market being in a form of denial. What you need to realize if lousy numbers produced a rally we would have seen a another hike up the wall of worry. It didn’t happen.

In my report to subscribers on Thursday night I hypothesized that the market had another opportunity to bottom due to a sell the rumor buy the news sequence. But that would have required a wash out in sentiment just in case a bad number hit the wire. We had the bad number but not the wash out. That’s troubling on many levels. The first level is the fact Friday didn’t create a bottom and by the close prices were lower than they were after the hysterical reaction early in the morning. But there is good news. People are finally waking up to the fact something bigger is materializing and the sooner they do, the sooner this sequence can play out.

Will it play out in July? It’s not an event we can predict but the fact remains that the Dollar is close to an important square out number and the Dollar is close to free fall. It’s comforting to me at this point because if it were to continue we may actually see an important bottom in the Dollar this summer. The problem is we have no idea from what level that might materialize.

Getting back to the equity market, they are starting to realize that something other than a soft patch may be materializing. A report by one think tank called Alix Partners, said that 61% of Americans don’t think the economy will ever recover to pre-recession levels or at least until 2014. To me, this is starting to feel like the late 1970’s all over again. If you start thinking what this country really needs to do in order to develop our youth and transform our education system you can readily see why so many Americans share this opinion. But once again, the stock market is not the economy. We need to see a degree of hopelessness to get a market bottom and it appears we are working on it but not there just yet.

Banks certainly didn’t help as they broke down one more time. Now they are truly in the path of least resistance down and the BKX is headed for the bottom of this bullish channel at 47. It closed the week at 47.69. You can see that isn’t much of a margin for error anymore. Finally we have the bond market which kept on rallying last week. It finally stalled but without the kind of calculations I like to see for a top. What does that mean? The big topic now is QE3 is on the table. I don’t much care for what politicians think about it but one of the biggest reasons the market fell last week was the appreciation in bonds. That’s a loud and clear signal the market has had enough debt for the time being.

At the end of the day we figured the early part of the week would be bullish since it was the end of month seasonal period. Once that was done, so were equities. This week we should see another bounce attempt but coming into the June the time windows don’t take effect at least until the 13th and quite possibly not until the 17th or 18th. We always get something interesting around June 18 which is 6/18 so will see. I think this could be another tough week.

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