Thursday, 4 November 2010

Dollar breaks down - CORRECTION STYMIED

The almost perfect correlation between the US dollar & stocks -
until that breaks or the dollar bottoms, markets are heading higher

Following the election results and the Fed's announcement of renewed quantitative easing, a flash of euphoria today lifted many stock markets around the world to new highs...

Since I made my correction call a couple of weeks ago stocks had essentially been in a holding pattern, barely moving one way or the other.  Even after today's break higher, many of the conditions which led me to expect an imminent market decline - namely the over-exuberant investor sentiment and extended technical position - remain in place and, indeed, these will only become more compelling over the next several days if markets push higher.  

But the one clear condition I placed on my call - namely a low being formed in the US dollar - has been crushed under the weight of Uncle Ben's QE2.  Unless and until the dollar can find its feet, stocks - and all risk assets, including precious metals & commodities - will hold up well and can advance further.  

I'll put some analytical flesh on these bones in this month's OntheMoney post, hitting your inbox Sunday night.*

* Don't forget, you can make sure not to miss an important update by subscribing via email, using the simple button top right of the blog.  Easy peasy.