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The FED Love
Fest |
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Wednesday's FED decision was exactly
what the market wanted. One and done. The FED lowered the discount rate
1/4 point, and stated it would probably be the last interest rate cut.
The market is now expecting the FED to start raising interest rates in
December.
I know many of you will argue with
this comment, nevertheless the market is doing what it's doing regardless
of what you think. The International markets are rewarding Bernanke's policies
by bidding up the dollar, which at this point is very good for our economy.
The market is bidding up the dollar
because it perceives the US is pretty much done printing money. Remember,
the market is a forward looking mechanism. Today's price movement reflects
what the market believes will become reality in six months.
Six months ago the dollar was simply
getting whacked. Why? Because oil was cranking up the charts, the US residential
real estate market was absolutely cratering, and the sub prime mortgage
crises was starting to get publicity.
Wednesday, the FED has made it clear
the "stimulus" series has come to an end, the sub prime mortgage mess has
been written down to the tune of billions of dollars on the financial statements
of institutions, and tech stocks are breaking out again.
There are two charts I want to show,
and they are the same charts I wrote about last week. The first is a chart
of the dollar:
The dollar's demise is directly related
to the rise in commodities. As the dollar fell, oil prices rose, along
with gold. The dollar is now clearly firming. It has risen just under 2%
in the last five trading days. That's a monster move in fairly short order
for the greenback.
After months of decline, the initial
rebound is impressive. However, there is something far more impressive
about this chart. UUP is the ETF which represents the dollar. Look
at the volume surge in this ETF over the last six trading days. The volume
is massive compared to the last several months. Fund managers are piling
into this security.
I'm pretty sure the dollar is not
going to come roaring back overnight. However, I do believe it has bottomed
and will slowly start working its way back up.
So, is oil destined to fall apart?
I don't know. I have read predictions from some pretty smart people that
oil will be back to $70 by November. I'm not sure I believe that forecast
as International demand is definitely growing.
However, I do strongly believe the
dollar's rebound will be at the expense of Gold. Gold is not consumed.
It is employed in some industrial processes, but it is not vaporized the
same way oil is.
The dollar's good fortune is Gold's
demise. After making a parabolic move to the upside in the second half
of 2007 and early 2008, Gold is giving ground rapidly.
This is the chart of a security that
is falling apart. It made a parabolic peak, made two attempts to rebound
in a double top, and then promptly began falling apart again. I believe
Gold is destined to head back to about $650 per ounce.
If you are long a lot of gold in
any of a variety of different ways, I strongly recommend you reduce your
exposure. That's just my opinion. I could be wrong. A month ago I heard
anecdotal stories about the gold craze. Gold mining permits applications
in Alaska were at an all time high, and you couldn't buy a metal detector
in Florida. When everyone piles in to this extent, it's usually the sign
of a top.
Unfortunately, gold's demise won't
be the kind of positive for the US economy that oil would be, but I'll
take it. It will bring money back into growth stocks, which is just fine
with me.
I think the BEAR market has
about run its course. Summer is ahead, so there will be listless trading,
However, growth stocks are starting to show signs of life again. Equity
markets are breaking through some key resistance levels.
There will be hiccups along the way.
The market is complacent now. The VIX is below 20, which is a good indication
it's time to go short for a trade. Shorting the QQQs might be a good trade
right now.
Today, I bought more puts on RIMM-
the May 130's. Call me a glutton for punishment. We're due to cool off
for a couple of days, so I like the trade. However, I believe the bias
will be to the upside from here on out.
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