Treasury Secretary John Snow said some interesting things over the weekend. Here's an excerpt from the lead article in the Wall Street Journal:
"After a week of roiling foreign-exchange markets with cryptic comments about the dollar, Mr. Snow was asked by reporters to define what "strong" means to him. Mr. Snow replied: "You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities."
More important than what he said was what he didn't say. Asked whether the U.S. strong-dollar policy still refers to its value against other major currencies, he paused and responded: "We're talking about these qualities that I enumerated."
Okay. We've got a new spin going on the dollar. The official strong-dollar policy is history. This is important. Currency markets are acutely sensitive to government talk, and once a notion grabs hold of currency traders, it tends to stay implanted for a very long time. Currency markets are the "trendiest" of all financial markets, with the highest Hurst exponent -- meaning they show the most persistent trends.
The trend in the dollar is down. Currency traders have been hip to the shift to a weaker dollar policy for quite some time.
We all need to pay attention to the big dollar gambit playing out right now. The bull case is the weakening dollar will help US companies by lowering the price of US goods internationally, and raising the price of imported goods in US markets. We'll lower our reliance on imported goods, and juice up the end markets for US multinationals.
The bear case is that the falling dollar will fall too far, as currency markets cannot be controlled in any meaningful way. When does an "orderly decline" become a dollar panic? A dollar that tumbles too far would cause foreign money to lose faith in the U.S. and pull assets out of stocks and bonds, and might also lead to reluctance in funding our massive current account deficit.
The bear case could potentially be very, very bad for the stock market. That's why I bring it up now.
But one thing the Bush administration has proven is that they are by far the best poker players on the world stage. They cleanly swept the pot on the Iraqi hand. But now they're officially staking out a seat at the biggest table of them all -- the world currency markets -- and they're going to need their skills finely honed to pull off this play for an orderly decline in the dollar. We'll be paying close attention.
As far as the stock markets, a combination of this dollar news and renewed terrorism has the futures off in overnight trading. With the internal balance caused by options expiration out of the way, the market is now in a position to make a much more chaotic, streaky move.
Sentiment has reached almost ridiculously bullish levels, as measured by the VIX, VXN, and QQV.
You can bet that "this time is different", and a massive surplus of bullishness won't matter this time, but you're going to lose that bet almost every time. The fact is, when the VIX gets down to 20 -- and it hit an intraday low of 20.57 -- then there's just not a lot left to push the market higher. Yet there's a whole lot of room for the market to tumble.
Also, I want to make one more important point. The markets are going to pull back at some point, when the VIX gets down to these low levels. That's what happens. The bulls will forecast a minor pullback here, and then a thrust to new highs. And that may indeed happen.
But here's the thing: nobody knows what the pullback will become once it starts. You've got to just act on the correct set-ups, and then let them play out. When you're trying to capture a mid-term trend, the market always offers one good, low-risk entry point, where the most energy is stored up to be released in the opposite direction. It doesn't mean the energy will be released right at that moment. It just means the potential is there, and the catalyst for a chain reaction is present. Whether the chain reaction sparks to life is just unknowable.
On the right signal, I'm going to recommend that you bet against this market. I'm pretty sure most people aren't going to hesitate about doing that right now. But that's good, because the best trades are invariably the toughest ones to enter.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tankdrained by 1 point down to 1% full of negative sentiment on Friday. We're at levels consistent with a bullish climax.
SHORT-TERM: Options Expiration probably rendered the hourly gauge fairly meaningless on Friday. Let's consider it closed for monthly maintenance.
MID-TERM: The mid-term gauge was unchanged at a raw score of 96% on Friday. That puts us into a neutral position, so we're at 96/4. Our Confidence Diffusion Index (CDI) regressed to a bullish 4. The mid-term advance phase has not reversed but it may be sputtering(as we can see on the tank as well).
LONG-TERM: The weekly gauge progressed 1 point to 100% in its advance phase. This weekly advance phase is extended to its upper limit. So, while it could run a bit and remain at 100% the more likely outcome is some pullback. Our weekly CDI regressed a point on Friday to a bullish 5. This regression was a function of maximal extension, not of a real visible pullback yet.
BOTTOM LINE: A reversal signal on sentiment could come at any time now on both our mid-term and long-term gauges and on the tank. However, I would not expect the market to give up easily or to make it a cakewalk for the shorts, given the recent strength of both breadth and volume, as well as the market's capacity to keep price and sentiment sustainably overbought.
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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