Wednesday, July 29, 2009

5-day Consolidation

The US Dollar ($USD) held support and moved higher and Oil ($WTIC) and China ($SSEC) got spanked.

But all and all, this has been a very constructive 5-day pullback.

Intel (INTC) is doing exactly what you would want it to do. It went vertical and has since been sitting in a very narrow 5-day trading range. That is called a Bullish Pennant and has the potential to be extremely productive in a very short period of time. Notice how price moved right to rising red line and has held. That is where I expect price to hold. Look for a big, fast move (up or down) in the near term.

The NASDAQ 100 (QQQQ) has a similar pattern and this has me interested in Tech for a potential trade.

Pullbacks to the 50-day
I bought some Microsoft this week on a pullback to the 50-day, because I have seen so many stocks pull back on bad earnings, only to ramp straight back up (see DELL). I also bought some PALM at the 50-day.

Biotech (IBB) has also gone vertical. I expect it to pull an Intel very soon and wait for the Red Line to catch up to price. I am in and not selling.

Look at how Transports (IYT) has simply pulled back toward the old breakout level.

The same goes for OMG and Brazil (EZA).

I am now watching the following closely –
The markets appear to be bottoming like the topped in 2006 -2008. Namely, key sectors are now breaking out of trading ranges and through key resistance, just as key sectors broke down below key support to set up the Bear Market. Remember, the S&P 500 only broke out of its 9-month base last week!

Retail (RTH) has been sitting around at the top of its trading range for the last 5 days. I would love to see it break out from here and play catch up with Biotech and Transports and the S&P 500!

Google (GOOG) has pulled back and is sitting around, right below critical resistance.

Apple (AAPL) looks like Intel. As does Cisco.

The setup is there to go higher. The markets have spent 5 days digesting the moon shot off the failed breakdown. Anything can happen, but I like what I see tonight.

5% Nominal GDP Growth

From Bill Gross at PIMCO today –

“Reflating nominal GDP by inflating asset prices is the fundamental, yet infrequently acknowledged, goal of policymakers. If they can do that, then employment and economic stability may ultimately follow.”

Does that sound familiar? First Greenspan admits it and now Gross.

“…nominal GDP has not only sunk below 5%, but turned at least temporarily negative. If allowed to continue – and this is my critical point – a portion of the U.S. production capacity and labor market will have to be permanently laid off. Nominal GDP has to grow close to 5% in order for the economy’s long-term balance to be maintained.”

Gross discusses how the entire Debt/Leverage-based Economy is built on the assumption of a 5% Nominal GDP growth rate. We are now below that level and the only way to get the consumer spending again is to pump the GDP up with credit. The best way to do that now is to use Government borrowing. Unfortunately (for Gross), that is proving to be politically impossible, so we will just have to live with the consequences of lower growth.

Nonsense. The Fed can print money without a vote being cast by either the Public or an elected official. Therefore, the Fed will keep pumping up credit via leverage of the TARP at the NY Fed and will keep printing money via Quantitative Easing to get back to the magical level of +5% Nominal GDP growth. That means inflation and a falling US Dollar.

Sunday, July 26, 2009

The Dollar Is the Key

Each rally in Stocks has been on the back of a falling US Dollar. I have included a chart below to illustrate this point.

Now, the S&P 500 (SPX) has hit a new rally high, but the Dollar has not hit a new low. The Dollar has a big decision to make here. A break above SPX 950 should be accompanied by a break below 77.5 in the Dollar Index.

The Dollar is now at critical multi-decade support. Failure here should be fuel for another run higher in stocks.

I would expect a break in the Dollar Index to be accompanied by a breakout by Gold.

I have total confidence in the long term devaluation of the US Dollar and the Long Term Bull Market in Commodities, Commodity-based Economies and many Foreign Currencies.

A falling Dollar has been used as a policy tool to ramp stock prices higher. That can last for a while, but at some point, people will lose confidence in the Dollar and pull money from Dollar-denominated Assets.