Hello and welcome back to CRI's CTS Spotlight Blog.
11/02/12: The
previously mentioned piercing of the 80.31 level in the US dollar index
proved to be a significant event but wasn't truly confirmed until the
later part of this week's trade. While its' previously registered bull
ab=cd target may be a little aggressive, the index is moving higher and
a test of the mid summer peaks isn't out of the question as we
approach the 'fiscal cliff'. Will this coming Tuesday provide any real
surprises? Considering intrade.com has Mr. Obama wining by a margin of
66% to 33%, a 74% likelihood of the Democrats keeping control of the
Senate and a 94% chance of the Republicans winning the House - a
surprise doesn't seem likely. Indeed, four more years of same old same
old as we march toward the anticipated 17.5 year 'fear' cycle peak in
Q3'17.
As we approach the all important US Presidential and US Congressional elections this November and the looming 'fiscal cliff' come January I thought it would be of some value to take a look at the US dollar index itself in earnest ahead of these events.
Since we are all familiar with our 35 year generational cycles and its effect on money flows (if not then I highly encourage you to do a refresher on my Macro Economic Trends webinar) then we know that during the 17.5 'fear' cycle (of which we are current in year 12 of 17) the US dollar Index itself will represent a fear vote in the market place. In essence, when the market is fearful money will run into the Dollar, when it isn't it will explore alternative 'riskier' assets - hence the term 'risk-on' vs. 'risk-off' trade. Simply put, one can glean the general happiness of the broader market during 'fear' cycles by how poorly the dollar index is doing.
So with this backdrop in mind lets go take a look at what is actually happening. Clearly the US dollar index has been well contained within a bull trend since the significant weekly/monthly double bottom registered through 2011. Until a corresponding double top comes in my general hunch is to expect higher not lower prices from here. Indeed, if one where an advocate of higher highs and higher lows defining a bull market (of which I am) then we see that the Index has been successfully registering higher highs and higher lows for quite some time. Conversely, tops of late (like the one seen over this past summer) are 'V' shaped meaning price goes straight up and straight back down. This in itself isn't the hallmark of a bear market but one rather of a bull market (something to keep an eye on going forward). This past 'correction' is telling in itself too. The fact that the market came right back to the 1 year 50% retracement level, did not break the previously registered double bottom and has now itself put in a new double bottom (with the break above 80.31) all suggests this bull is rather healthy and normal in nature. A trade through those recent lows (78.6) & the 50% level (78.55) would cause me to reconsider but considering the potential upside objective (85.30...see below) and one ought to at least consider the long trade (80.31) from a risk/reward perspective (ie 1.80 risk vs 5.01 reward).
Technical outlook: So if we are pointed higher, where should investors expect this market to go? I personally have four bullish targets in mind should this little double bottom of late hold. Firstly, I shall expect the market to at least attempt a 50% retracement of the late summer selloff (currently 81.42 area). Once there, I shall look for the market to move into the OTE Short Sweet Spot (currently 82.58). Should price continue to point higher my next target shall be the summer peak (84.245). A break above this high would in itself represent yet another longer term bullish signal for the Dollar Index (and a very large 'fear'/sell signal for the broader market) and would suggest that the previously mentioned bullish AB=CD target is very much still in play (currently that target is near 85.30).
Fundamental drivers: So with all this US Dollar technical bullishness I have to ask myself what are the fundamental drivers for such a move going forward? I believe the US economy (and by default then the world economy) is heading towards a massive contraction very much like the contraction seen in the late 1930's (almost 10 years past the '29 crash) that literally laid the ground work for the 2nd world war. The looming US 'fiscal cliff' and the now completely failed 'austerity measures' of the PIGS nations of Europe are very much like Germany refusing to make WW1 reparations in the 1920's. While in the short term they are headline catchers and make for good political fodder, these kind of policies have far reaching consequences for national currencies, domestic economies and play right into the 'fear' cycle scenario. Indeed, very rarely do we see economists agree on an outcome; yet here it would seem they all agree that an economic contraction (dare we use the 'R' word) is coming, the question is how big (Reuters news link).
We know commodity prices will boom into 2017 which also means paper assets will bottom. That event is just under five year away and we will be guaranteed to see some very wild price swings over the interim. The combination of global competitive currency devaluation (QE programs) coupled with bad debt being piled upon more bad debt (historic budget deficits) has pretty much guaranteed our anticipated 'fear' cycle peak outcome - the only question now, how violent will violent get....and unfortunately, it can get pretty ugly around these 'fear' cycle turns...
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
the_rational_investor@yahoo.com
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