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Friday, May 6, 2016

Daily update 5/6 Thoughts on the dollar

Bounce attempt started.

SPX tested below the 50 SMA this morning and rebounded.  This is a good place to bounce from.  That doesn't mean it will though.  Breadth was +60%.  New highs were strong at 171.  I perused the new high list and as I speculated it was mostly closed end funds. There is no rush into stocks making new all time highs.  New lows also increased some to 36.  The increase in lows probably happened on the early test lower. 

The futures ended with a green price bar, but still below the 20 SMA.  The last time we had a green bar they sold it hard on the very next bar.  There is more room on the upside before changing the trend. 

The red count slipped down to 54.  It never reached oversold levels despite SPX breaking the 20 DMA.  This still does not look like a good setup for much of a bounce. 

SPX started a bounce today off the 50 DMA.  It was likely helped by the miss in the employment data this morning which took the June meeting off the table for a rate hike. However, SPX did not do enough to suggest there is particularly high odds the bounce will continue on Monday.  Whether it does or not will likely depend on the news flow.  The 20 DMA would still be the upside target if the bounce gets going.

I hope I have made it clear I think the dollar is in a multi year bull market.  However, it has been correcting that powerful up move for more then a year.  I commented a few nights ago about the retest of the Aug. low.  This weekly chart shows the dollar hit its 100 SMA and tested below the Aug. low before rebounding strongly.  It followed through on the upside by being positive for three more days in a row.  This looks like a pretty good bottom to me.  There is no shortage of people calling for more down to make the sentiment picture fit as well.  I think I know what might drive it higher.  I have not heard any analysts talk about this yet.  Let me start at the beginning.  Back when the FED was printing money like mad the dollar didn't go down.  I found that very curious and I could not explain why.  Sometime last year I started reading about all the foreign dollar denominated debt.  I have mentioned it in the blog a few times.  The last number I heard was north of $9 trillion.  The payments on those loans must be in dollars, but that is not the native currency of any of the borrowers.  Any entity that does not generate enough extra dollars from business operations must go out to the open market to secure them to make the payments.  Given the amount of the outstanding loans it is not hard to imagine that happens quite a bit.  I would not be surprised if some of these borrowers aren't busy taking advantage of the dollar dip to secure more dollars for future payments.  I know I would be if I was in that position.  I think there will be more then enough dollar demand to keep it from breaking down.  That problem could become more acute if the U.S. were to go into a recession.  That would reduce the dollar denominated sales to just about all foreign companies.  I find it interesting that despite the retest and strong rebound I have yet to see anybody calling a dollar bottom.  I feel like I am alone on an island with this call.  I am used to that.  Most of my best calls have come that way.  If I am right there will be repercussions all around the markets.

I saw this snippet in a USA Today article.  This is a good example of the trash that comes out of Wall Street.

That brings us to Friday’s jobs report, a closely watched data point that Daglio says “gives us the most accurate picture in real time as to what is happening with the economy today.”

When you hear anybody using the employment data in real time to analyze the economy run as fast as you can.  It is a lagging indicator and highly revised.  Just like GDP it is completely useless in real time.

The market and sector status pages have been updated.  Have a great weekend.


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