A Market Top Signal

Posted by Ray on August 7, 2009 under Main | Be the First to Comment

We have commented on the dollar’s weakness for a while now, but today we are seeing surprising strength in the dollar index. This is telling to the markets potential future behavior as investors tend to move into the dollar when the economy is questionable or they foresee potential problems.

For an example of this move just look to last fall when the dollar had huge gains against all major currencies. Why do people move to the dollar during economic turmoil is a very important question and the answer is fairly obvious, we have the most liquid market in the world, you can buy whatever term of government debt you want from 1 day to 30 years, and you will get your money back since we have never defaulted on our debt. However, while we guarantee your money back, we do not guarantee the buying power of that money.

The dollar’s strength today, in the face of a “better employment report” or the latest “green shoot” the dollar should be declining in value as the risk trade should be on. The problem is that it is up over 1% for the day and, in my opinion, is signaling that some major players think there could be some rough days ahead in the risk trade. I do not think you need to be a rocket scientist to figure out that it is nearly impossible for the markets to go straight up, but it has since July.

I do not have any data on who is buying, but my spidy senses are tingling and when you see a contrary indicator go off, equal to the markets move, you have to react. I am reacting by reducing my US equity exposure to 15% and I may take all US equities off the table by the end of the day. The other point of interest is that even with such a move in the dollar commodities are rather tame, gold is down slightly, silver is up and oil is down slightly. With such a move in the dollar these commodities should be crushed today.

As you know I am no bull in this market, a first time in years I might add, but this should make everyone pause and reflect on your current allocation. Corporate bonds are a good haven, in my opinion, as they are only pricing in flat GDP growth versus the S&P pricing in 4.5% GDP growth. I also like PCY which is an ETF sovereign government debt fund yielding over 6%, I do own this security, which could be a good place to go for 2 reasons:

It is out of the dollar, which I am a long-term bear on, and;
It has a nice yield and has performed fairly well during the last economic downturn, it recovered very quickly.

Here is the DXY Chart: