This is a market of future expectations. It is a market of inflation versus deflation. As we all know by now corporate earnings are no longer the main focus for a continued move higher in the stock market. It is now all about the U.S. Dollar Index. As the U.S. Dollar Index declines the world markets inflate and trade higher. That is right I said the world markets. The U.S. Dollar is considered the worlds reserve currency. If you have ever been fortunate enough to travel to Asia you will have noticed that business’ will accept U.S. Dollars as easily as they will accept their own currency. All commodities such as oil, gold, silver, copper, and most others all trade in U.S. Dollars. They are not trading in Thai Baht, Chinese Yuan, or even Japanese Yen. It is the U.S. Dollar that commodities trade in and really nothing else.
Recently the U.S. Dollar Index has declined sharply sparking a huge rally in the stock markets around the globe. The U.S. Dollar Index has declined by 13.0 percent since June 7th, 2010 as central banks raced to devalue their currency in order to boost exports. However, as we all know by now when a major geopolitical event or financial crisis strikes the large investors seem to come running back to the U.S. Dollar. Just look at the U.S. Dollar Index in 2008 when the financial crisis was at it’s peak. The U.S. Dollar Index spiked sharply higher. Unless the U.S. Dollar Index is doomed at one time or another the U.S. Dollar Index will catch a bid again.
In the trading world it is well know that what has happened before will happen again. Therefore, as long as the U.S. Dollar Index declines the stock markets will rise. However, there will be a day when the U.S. Dollar will catch a bid again and this is a likely time when the stock markets will sell off again and sell off violently. Just look at how quickly the stock market declines when the U.S. Dollar Index catches a small bid higher these days.
A case can be made that the 2008 financial crisis really took the markets down when oil reached $147.00 a barrel. This seemed to be the straw that broke the camel’s back. Just thing about the stock market rally since late August. Every commodity has soared higher including oil. Can an already strapped U.S. consumer handle high gasoline, and heating oil prices? I seriously doubt it. This weak dollar policy by the U.S. central bank will work for a while, however, this is certainly not a permanent fix for the economy. It is just more kicking the can down the road. Unfortunately, the dents do not come out of the can the more it is kicked.
Nicholas Santiago
Chief Market Strategist
www.InTheMoneyStocks.com
