Need a mood-boost before the markets open? How can anyone be down seeing “shiny, happy people having fun”?!
Trivia Question?
Since mid-July the Dow is down 6.6% from its high of 14000. Which currency shares are up almost the exact same amount in the same time period?
Answer: It is the FXY (Currency Shares Japanese Yen Trust). Bloomberg reports that “The yen gained versus all 16 major currencies this week as the carry trades unwound”.
Bloomberg also reports that “Economists forecast the Bank of Japan will refrain from raising interest rates next week after the global subprime and credit turmoil.” Meanwhile on this side of the Pacific, the fed funds futures contract is pricing in a 100% probability of a cut in the fed funds rate on September 18.
The expectation is for a 25 basis point cut with a further cut in future months. This follows the recent 50 basis point cut by the Fed in the discount rate – the rate it charges banks for direct loans. The Fed Chairman has been attacked for his steadfast approach in maintaining the sub-prime mortgage rout was contained before his concession on Friday that all was not as he purported it to be. “It was a rookie mistake,” said Kenneth Thomas, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia. The Fed “underestimated liquidity needs” of investors and the fallout from the housing recession, he said, adding, “This demonstrates the difference between book-smart and street-smart.”
In Europe, speculation was rife just a few weeks back that the rates would be hiked again, but recent liquidity injections have poured water over those flaming rumors. If interest rates do continue to rise around the world but fall in the US, the dollar may indeed reach the forecasts set by some analysts of $1.50 against the euro within 12 months. Is it time to bid Adieu or maybe Sayonara to the dollar? I prefer Auf Wiedersehn…it implies we may see the dollar again one day in the future reclaiming its old glory!
In the short-term, any dollar demise should not have a significant impact on the market. The long-term fallout is just too painful to think about so let’s skip quickly past such torturous considerations. The result of a weak dollar is likely going to mean a continued stock market rally. International companies prosper handsomely from currency conversions back to dollars, which has the effect of appearing to boost earnings. Before jumping on board the Dow 15,000 bandwagon though, we have to navigate past this volatile market. Much like a ship sailing through rough waters, the increasing magnitude of the undulations tends to precipitate sea-sickness for the uninitiated while the old sailors tend to remain unperturbed by short-term storms in favor of remaining focused on their destination (the long-term!).
It appears to me that we could rise up another couple of hundred points on the Dow before encountering a down-trending resistance line that began with the 14,000 peak and continued with the 13,600 rejection. Until that resistance is broken convincingly I remain unconvinced that we won’t test the lows again. On the other hand, a convincing break above the 13,400 level would be a very positive sign. Happy will be noting levels he is watching and the volatility on the charts is such that any number of points could be highlighted as critical, but the bottom line is the charts still show a bearish trend and a moderate up day on Monday is unlikely to change that.
The old adage reads “the trend is your friend” and it has protected us at Phil’s Stock World over the past few weeks. Don’t ignore the adage until we hit extreme levels – in the past the VIX hitting 50 has been emblematic of the market hitting extreme panic levels and was historically a perfect time to go contrary to the trend. Those contrarian opportunities do not present themselves frequently so patience is still warranted until we see trend changing confirmations.
And, as highlighted in this valuable e-book mentioned in the pig-wrestling article earlier in the week, sentiment can dominate fundamental and technical analysis in the short-term! Phil and I both integrate all aspects of due diligence into our trading. We are not solely fundamental value investors or solely technical analysts or solely contrarian sentiment traders. Instead we integrate all aspects into a trading system that transcends each alone.
As a result, you will see Phil trading a long-term virtual portfolio based primarily on fundamental due diligence while simultaneously trading short-term moves that incorporate technical analysis amongst other things! And one of Phil’s favorite rules: “Always sell into the initial excitement” is based in an understanding of sentiment and emotion.
Do you typically sell into the initial excitement or are you tempted to buy into the excitement? If you don’t have a system that works for you, you can increase your trading skills by increasing your learning. We are dedicated to improving your education at PSW and encourage you to strive to learn more. .
For now, I will wish you all a wonderful week ahead. Phil has handed the vacation baton to me. So, now that he is back, I am taking off for the sun! I’ll be around for most of the week before travelling abroad and plan on returning in early September. Make it a great week!
Trade Safely!
OptionSage
