US dollar

Exciting times. And are stocks worth the risk?

First, we want to make you aware of some exciting opportunities in the works here at Black Swan Capital.

We've been fortunate enough to forge new working relationships with some real professionals in the financial industry. The ultimate aim of these partnerships is to bring you services and opportunities that hep you trade and invest successfully.

More specifically, these relationships make it easier to use and manage the ideas provided in BLACKSWAN's Premium Service trading newsletters.

We'll begin unveiling these relationships starting this week. So stay tuned to Currency Currents to learn about ways you can build a successful trading approach to capital markets.

Now let's talk about the markets ...

Are stocks worth the risk at these levels?

A friend of ours, Terence Brogan at Brogan Group Research, passed a chart along to us this morning. He gave me permission to share it with you. It shows the recent action in the US dollar index futures. More importantly, it shows that money flows barely budged during the recent short-covering rally we saw:

[Click on thumbnail to view full-size image.]

Here are some additional comments from Terence:

There has been very minimal accumulation of the USD since June ... from a price and volume perspective. The USD has been closing below its daily mean price more days that not, and on the days that it has closed above its daily mean price it has not been on persistent high volume. This tells us that there have been more sellers than buyers of the USD since June this year.

Basically, considering the money flow models developed by Brogan Group Research, this all suggests the US dollar is in for renewed downside pressure.

We'd have to agree. In fact, Jack's analysis is suggesting further short-term weakness (at least) is in store for the buck. And he's already recommended ways subscribers of his Black Swan Forex service -- BSFX -- can trade this price action. (Click here to subscribe or read more about BSFX.)

This US dollar action, as one might suspect, probably feeds into the general risk appetite mood of markets. In other words: because financial markets have become so tied to the flow of dollar-based liquidity around the globe, a falling dollar suggests this outward flow of dollars in search of return will persist.

All that in mind, the continued rise in the stock market prompted Jack to ask Terence if we'll see risk aversion rear its head ever again.

That's certainly the question of the day. Commentary is swirling something fierce about potential unintended consequences of Federal Reserve monetary policy, e.g. asset bubbles.

Meanwhile US stock markets are railroading higher and dragging global stocks higher alongside. Take a look at this weekly chart of the S&P 500 -- I've drawn in key trend channels that go back as far as 2009:

I also applied a Fibonacci extension to the first part of the bull market rally that began in 2009 and went through March 2011. It shows we've now fully extended (100%) that initial wave as trend channel congestion now may begin providing resistance. 

Does this mean the S&P can't or won't go even higher from here? Of course not.

But I think it does add to rationales for why the upside might be exhausted at these levels. With all the talk of bubbles circling the markets, and the continued speculation about the integrity of economic recovery around the globe, do items like this not create further doubt?

I believe a sell-off could materialize as enthusiastic investors and traders start asking themselves: is it worth the risk?

You can debate valuations back and forth till the cows come home. But up until recently, the landscape of global economics and financial markets has proven that investing in the US stock market was easily worth the risk.

But just as rising feed prices influence demand from livestock operations, rising asset prices reduce the demand from investors and traders who see potential risks growing and potential rewards dwindling.

One final chart -- margin debt on the NYSE:

Basically, the point of showing the rise to record levels of margin debt -- i.e. traders borrowing in order to invest in stocks -- is to highlight the fact that there are probably many weak hands in the market right now. It is they who will run scared at any sign of heightened market uncertainty. It is they who'll add to the selling momentum in any "abnormal" downturn.

It is they who threaten the risk appetite mood. Thus, it is they who threaten the money flows that are keeping pressure on the value of the dollar. When investors run scared in a herd-like fashion, these money flows tend to reverse as they accumulate US dollars. 

This isn't necessarily something to act on now. But it is something to keep in mind, all things considered.

Remember: Stay tuned!

-JR Crooks

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Eurozone economy will "turn the corner" ... to a new LTRO?

And the headlines read:

Sharp euro zone inflation drop, record joblessness add to ECB conundrum (Reuters)

EU sees 'hope' but also lower growth (BBC)

Euro zone economy turns corner, but growth, inflation subdued: EU executive (Reuters)

Well, the downward revision of growth from 1.2% to 1.1% is certainly not jaw-dropping. But is it enough to spark a subtle shift in sentiment that generates a more fragile consensus on the eurozone?

Sure.

The joblessness is no surprise. As it has been in the US, unemployment will be a critical impediment to the eurozone's economic recovery. Spanish utility Gas Natural Fenosa has particularly acknowledged the depressed demand in Spain and the nearby areas. It's due very much to the severe unemployment situation. Gas Natural seeks to make its progress and profit in Latin America in the coming years because the outlook for economic growth in the eurozone remains grim.

But perhaps the most important piece of the headlines to be pulled out is the inflation data. We know what subdued inflation means in this era of monetary accommodation: more accommodation.

Does that mean another LTRO (Long-Term Refinancing Operation) is right around the corner, the same corner around which the eurozone economy will supposedly turn?

Doubtful, at this stage. But don't abandon the idea completely. If things get nasty, the European Central Bank will need to do something to help re-recapitalize a financial system built on crummy collateral. 

Instead, what's more likely in the interim is the strategy du jour for central banks: talk the market to sleep. 

The ECB's rhetoric, perhaps when they meet later this week, in light of subdued inflation, will signal:

  1. Economic activity shows stabilization but still has room for improvement
  2. The central bank has room to provide additional support measures IF needed without fear of generating inflation or asset bubbles

In other words: don't worry about the economy. But if you do, remember we're there to backstop it ... so don't worry about the economy.

Ok. Got it. More accommodation. Woo hoo. So what?

So, barring any real shocks to the financial system, real or perceived, we're left to juxtapose expectations for the European Central Bank and the Federal Reserve.

In the weeks following the agreement reached on the US debt ceiling, market expectations shifted mightily into believing Federal Reserve tapering was to be long-delayed. Decent US economic data is surely to erode that enthusiasm and expectations will then shift back to believing tapering is on its way in.

Assuming I'm right about the inevitable shift in Fed expectations, and the ECB's further-accommodation-if-needed rhetoric, the resulting change in yield differential will be US dollar supportive.

And that seems appropriately timed, since in just the last few weeks predictions for the US dollar's demise have ramped up noticeably. And this story about South Africa diversifying their currency reserves is sure to validate the bears' collective growl.

The euro may recoup some of its recent sharp losses in the coming days. But it could have very likely already made it through a turning point of its own, one that sends the value of the euro much lower in coming months.

-JR Crooks

P.S. We mentioned the open EUR/USD trade last week that was showing open gains of about $1,500. Well, that trade is still open in Jack's Black Swan Forex trading service -- and it's now showing $2,810 of open gains per one standard-sized lot. And Jack's locked in, gauranteed, $2,540 of it.

Click here to see how the rest of Jack's trading advice has panned out this year. I imagine you'll be impressed.


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It's a lay-up: buy stocks!

cowboy bull“He may look like an idiot and talk like an idiot, but don't let that fool you -- he really is an idiot.”

- Groucho Marx


John Ross asked me this morning if I could create a scenario whereby stocks fall.  I laughed and said, "Well ... no!" And maybe that is the point. No doubt 'if you are not long, you are wrong' is playing out in spades. But we’ve seen that sentiment many times before near tops.  

The primary thematic shaping up seems the idea that bonds have topped and as this money leaves bonds it will power stocks higher—globally. The idea seems to make sense; but often it is never that easy.  Taking a look at the chart below, there doesn’t seem a heck of a lot of correlation to hang your hat upon, only to say the long-term trend higher in bonds (lower in yields) has been met by a corresponding big run in stocks.    

Let’s consider some reasons why US stocks might NOT go a lot higher and, for grins, maybe even, dare I say it, “correct.”  

  1. A recovery in the US economy could mean finally financial assets will start competing for funds and the Bernanke Put, i.e. QE moral hazard liquidity juice, fades. Bonds would get hit here, but stocks might at least correct.

  2. Bernanke’s concern the job market is still not healed may play out because fiscal stimulus fades as the year progresses. Thus, we have well below trend growth and rising prices for energy and food leading to at least a mild case of stagflation; that isn’t good for either stocks or bonds.

  3. Germany decides to go “all in” and throws its full faith and credit behind a Eurobond for the Eurozone. Immediately, the risk profile improves in Europe. S&P and Moody’s decide it’s time to upgrade European paper and at the same time downgrade US paper given that Washington can make no real cuts amidst ideological squabbling. Lots of capital flows back to European bonds and stocks and out of the US; a possible triple-whammy out of US assets (stocks, bonds, and the dollar).

  4. China financial and social unrest ramp up and the Communist Party is at odds on stimulus given their concern about inflation; therefore it’s better to have security locally than worry about Western markets; the additional stimulus never arrives as growth and demand forecasts for China ratchet lower. Likely bad for stocks, but maybe good for bonds.

  5. Eurozone. 'Nuff said!

  6. Rising emerging market capital controls a la Brazil (tacitly condoned by the IMF) are met with rising trade tariffs from developed countries.  Money flows out of risk assets (stocks), quickly from the periphery, and back into bonds as global trade falls.

  7. Republicans win the White House and Congress, fire Ben Bernanke, and make Ron Paul Fed Chairman. They cut the budget deficit twice as much as what Paul Ryan is lobbying for. Ultimately it would be the best thing that happened to the US financial position in a hundred years, but there would be hell to pay as US credit drains from the global economy (and we have to listen to the moochers whining and crying about “fairness” day in, and day out). US bonds rally big time, so does the US dollar; stocks would likely be hit very hard initially, then stage a gargantuan rally.  [I know; but a guy can dream.] 

For now, “don’t fight the Fed” and “the trend is your friend” are winning the day. And if the bulls are right about US recovery, European healing, and new Chinese stimulus soon on the way, it could keep running. No doubt.  

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