Will the Fed Save the Dollar
The
market action was mild yesterday. The indices were
negative for most of the day, but in the final hour most managed to
either close with a small gain or back to even. Volume was pitifully low
as energy stocks slipped the most. For the SPX, 1335 continued to provide
moderate resistance as the index closed 1335.25 on Monday.
The SPX has struggled for the past week to take out key resistance
at 1335, and if it doesn’t take it out soon, SPX is going to come back to
1301 quickly. But a move beyond key overhead resistance should bring the
index back up to 1377, my near term trading target.
Yesterday new home sales came in hotter than expected, which was
great news. But the market reaction was not exactly positive. In fact,
there was no reaction. Buyers did emerge somewhere, lumber futures
increased 1.5% yesterday, but that’s likely because it has been down 25%
in two months. Today the market will receive Case Shiller home price
data. An increase in home price combined with yesterday’s bullish sales
number should have the market cheerful. But given yesterday’s lazy
response, lumber and home builders may be the only segment to see any
increase in action.
With the passing of each session, I become more convinced that the
most recent rally from the stock market has been driven by the falling
dollar and not good fundamentals. Surely, the earnings this quarter have
been phenomenal. Nearly every company that has reported crushed both
revenue and EPS estimates. But the stock market hardly budged.
Also, most indices still have not taken out the February high. If
earnings were so rosy this quarter, then all indices should be at their
high of the year. Additionally, and this is the most important component,
volume should be soaring as investors pile into stocks on the heels of
record setting financials.
While I continue to believe that the market will
go higher from here – if for no other reason than it doesn’t know any
other direction to trade – I am highly concerned that volume was so low
over the past month. Towards the end of last week volume picked up, but
Monday, the volume level shrunk to half of last week Monday’s
level.
Today is likely to be another low volume session, and for good
reason. Durable goods orders come out tomorrow morning and then in the
afternoon the Fed will give the public (hopefully) its game plan for the
end of quantitative easing.
The Fed is anything but aggressive, and I suspect any exit from
this program will be orderly and slow-paced. Investors would most
certainly sell everything if the Fed rushed to increase rates. But, I
think tomorrow, if the Fed clearly lays out an exit strategy and hints
that this round was the final round, the dollar would rally. And if the
dollar rallies, much of last weeks gain in the market and commodities
should disappear. Furthermore, energy stocks, which already appear weak,
would be devastated.
The misery of the dollar has boosted, or at minimum, provided
stability to the fragile market in April and for most of 2011. The
decline of the dollar will likely continue as long as the U.S. government
supports loose policy and deficit spending, especially at a time when
most nations operate with austerity and fiscal prudence. But that may
change very soon. More
on the market and twenty stock setups was discussed in the weekend video
here, this should be a memorable week.
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