This morning the U.S. dollar is breaking down to new lows. Because of our large trade deficit, which came in around $500 billion in 2002, it takes about $1.5 billion per day flowing in from foreigners just to keep the dollar where it is.
Right now the dollar is breaking down to new lows. It looks like the foreign appetite to fund our economy is waning. Here's a look at the dollar index, a broad measure of the dollar against other currencies:
You can see that the dollar has been firmly beneath its 10-week exponential moving average for months. It has not participated in the "Iraqi war rally" in stocks. We have the growing federal deficit, as well as the miniscule return on U.S. treasuries, to thank for the eroding dollar.
This looks like an important non-confirmation of the "next bull market" thesis. The plunging dollar is not a compelling picture for a U.S.-led global economic expansion. While I'm certainly not a currency maven, it is important right now for equity investors to watch the dollar, as it's a good sentiment-read on how the world is sizing up the situation in the U.S. Right now, they're not buying.
The VIX is also at an interesting spot. It's given a "daily buy" signal on our best timing model, which equates to a mid-term sell signal for the market.
But we don't yet have this same signal for price, which is hanging up near its highs. So there is no confirmation yet for this signal from the VIX.
I say no confirmation yet, because this sell signal is inevitable. Decline phases in the markets have not actually been abolished, as much as people are hoping for their disappearance. We're now getting the first hints that the momentum of sentiment is about to swing back against the bullish majority. Once the momentum on the VIX starts showing rising fear, it will be a massive "long squeeze" -- where those holding long positions get squeezed without the benefit of big short positions to prop up the decline in stocks.
The coming mid-term decline has the potential to be a whopper, mostly because people can't even think of a reason why it should happen. That's the time to be on high alert. As I've mentioned many times before, extremes of bullish sentiment cause tricky, rounded tops, with many attempts to breakout at the end. We're seeing this now with repeated and sudden attempts to crack through SPX 920.
We may even pierce through and make another exciting breakout to the upside. Who knows? But this advance is living on borrowed time, and the next major multi-week move is going to be to the downside.
Now, if by some miracle the coming decline is met with real fear and panic, and price doesn't erode all that much, then the market may just be building a solid sentiment foundation for a longer bull move. I doubt it, based on recent investor behavior, but I'm certainly open to it if it's going to develop that way.
So ironically for the bulls, the real key to longer-term success is how price and sentiment behave during a decline phase -- and not how rosy everything looks while prices are going up.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank filled 1.5 points to 5.5% on Tuesday. Sentiment has achieved a virtual unanimity of bullishness. Normally when that happens, everyone who wants to get on the bus has already gotten on.
SHORT-TERM: The hourly gauge remains essentially trapped in a neutral consolidation.
MID-TERM: The mid-term gauge remained unchanged with a raw score of 99%. If the delta (change) were positive then we would record it as a bullish 99. If the delta were negative then we would record it as a bearish 1%. There is no delta so the gauge is recorded as neutral with the dual 99/1 reading. Our CDI regressed to a bullish 1, which is very close to neutral.
LONG-TERM: The weekly gauge regressed a point to 89% in its advance phase. Because it is a weekly gauge it can regress intraweek and remain in an advance phase. It's still up 8 points from Friday's close. Our weekly CDI regressed to a bullish 3.
BOTTOM LINE: If this SUV has a 20-gallon gas tank, the gas gauge has probably been flashing for the last 30 miles. There's about a gallon of gas in the tank. If this pig heads up a steep hill all the fuel will slosh to the back of the tank and the vehicle will start bucking, wheezing, and knocking like it needs the Heimlich maneuver. (Could go up, but there's a surfeit of "positivity" out there.)
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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