10/26 Daily Commentary

I spent a couple of posts today describing the Fed behavior in light of the dollar and the dollar's impact on stocks and commodities. These are re-posted at the bottom tonight.
I1 bottoms either today or tomorrow. 

Dollar index produced a buy signal based on it's 90-minute M/A.  It also completed a 5 up from it's low of 76.875 yesterday.  Because it completed a 5 up it must now perform a 3-wave retracement to about the 77.30-77.40 area.  So although the 5 up and the buy signal are enormously helpful for weak stocks and weak commodities, the near term will be the opposite due to the requirment of a retracement downward. 

There was a 90-minute M/A buy signal last week but it was cancelled due to the dollar weakness attributable to the G-20.  There will be further confirmation on a DX close > .50 above it's 18-day simple M/A.  Tomorrow that should be roughly 77.10. 

The dollar has been the main casualty of Fed operations.  When international capital flows into the dollar then I will know that the Fed has lost the initiative and market forces have taken over.  This will be very bearish for stocks and commodities. 

After the close SP futures came up to their 30-minute M/A (blue line on chart) at the same time as hourly stochastic registered a high reading of 93.  A stochastic at this level does not mean that a rally if over but in combination with resistance it increases probabilities greatly.  Looking at the hourly stochastic is does serve as a rather good overbought/oversold indicator.

Due to the fact that I1 double-bottoms today and tomorrow I sold 6% SDS at the close for 27.24. I still hold 4% DXD and 2% QID.

Here is a repost of comments on Fed action and the importance of the dollar index.

In essence the Fed has been monetizing the federal debt. By not selling the securities to the public Treasury has made the Fed a major buyer of federal debt. Unlike other buyers when the Fed buys treasuries it makes magic money (not credit). The Fed has been taking advantage of the treasury buying by slowly cutting back on it's crap holdings, leftover from Bear Sterns, MBS, etc. However, the net effect has been to slowly increase it's balance sheet (make magic money).


The Fed last did this in the late seventies. Back then the bad side of money creation was inflation. This time the bad side of money creation is protectionism, which is increasing worldwide. If the Fed does not put the brakes on promptly the U.S. will be facing trade barriers and beggar-thy-neighbor with it's partners, deteriorating relations at all levels of their governments, and the potential loss of reserve currency status which would be devastating.

I posted the Daily last night that QE is neutralizing market sentiment. That seemed to have bothered some. I have been making money throughout the QE acceleration of the past month. QE is not creating credit, which is how fiat economies grow. QE is creating money which is depreciating the dollar and artificially increasing the nominal value of dollar-denominated assets. The marginal demand that drives the markets are hedge funds and carry trade. Borrowing dollars for nothing and throwing them into non-dollar-denominated markets suppresses the dollar due to the exchange. This is what has driven commodity markets to double since the 2009 low. CRB from 150 to 300 which in the Weekly I marked as a completed abc following the 5-wave 2008 commodity bear market from 500 to 150.


Although I did not like Greenspan's rate policy I believe that he would never have embarked on QE except in the most limited sense. Bernanke-style QE will not be a permanent part of the monetary landscape. It is a temporary phenomenon that will be discredited once the full ramifications of it are felt. The whispers on the street are that another big round of QE is coming. I don't believe this will happen because enough of the impacts of original QE are being felt and are creating an economic island U.S. This is what the socialists want, to erect fences around the economy to keep out the bad and only allow the good. So a falling dollar is seen as a good to them, but the bad aspects have yet to be felt. So far inflation at wholesale and consumer level has not responded to the panacea. The prices of commodities have gone up but these have not filtered into final goods costs either here or overseas. The trading partners do not perceive this as a good because they pay double, with increased commodity costs which are difficult to pass along into product pricing and a rising currency at the trade table. I actually heard a $2 trillion number floated for QE2. How preposterous! The final number will be much smaller and probably incremental. QE will fail and be shown as bad policy, but markets have to wait for the fallout to occur. William Miller was Fed chairman in 78-80 when the dollar tanked as a direct result of radically misguided Fed policy. The result was not economic good, but evil itself. We've seen an increase in gold to 1350 as scared investors seek to avoid inflationary fallout. Yet that inflation has yet to occur. Why? Because nobody wants to go further into debt and banks don't want more loans on their balance sheets. So the majority of this money has gone into leveraged speculation. The unwind will be legendary and will discredit the Fed, along with the increasing ire of our trading partners. This is Greek-style monetary policy and the Germans are not amused.

So I1 measures market sentiment toward the most sensitive litmus, the stock market. However, a falling dollar prevents that sentiment from translating into lower nominal prices. Hence, watching the dollar as a cue that the Fed's effect has worn off. If the dollar can have a sustained rally then market forces will be shown to overwhelm Fed action. The amount of Fed action is miniscule given the volume of international dollar flows, in and out. However, by enabling the carry trade and hedge funds the Fed multiplies the effect, not into the real economy, but into speculation. It never ends well.