Wednesday, October 21, 2009

A Closer Look at the USD Reveals That the Decline in the Index is Almost Done

A quick post today, to follow up on yesterday's article.

We certainly believe that the stock market is at or nearing an imminent turn towards a rapid crash in prices.  Against that movement, we have the USD, which should perform at least as well as it did through the end of last year as equities around the world collapsed in price.

The Daily Sentiment Reading on the USD is holding at 4% bears, and has been at or below this level for over 3 weeks now.  I cannot recall ever seeing a highly negative reading stay so dire for so long.  This shows that there is almost no one left on the long side of the trade - similar to the type of reading we saw on the S&P500 through March of this year, just before the market turned and started its most breathtaking rally in almost 3/4 of a century!

Open interest on the EUR/USD has been setting record after record, showing that the last legs of this rally have been purely speculative, most likely investment banks using that well-earned TARP money to try to squeeze out some more profits.  The open interest move from July to August alone was from 244,666 (a record for all time) to 271,410 (a much higher record for all time!).

Even just by looking at a chart we see the same sort of waning true strength with some simple indicators.

Notice that, just as in Nov-March where the USD made a new high, the price itself might be moving up, but the strength of those price movements is dying fast.
As usual, we recommend taking the contrarian approach - selling stocks, just when the media thinks that everything has been effectively papered over by the government and the "worst is over", and buying the dollar, at a time when a fellow like Robert Kiyosaki is saying "it is trash" and that we should all be buying precious metals.

That's right, folks.  Robert Kiyosaki - the fellow who was telling you to buy maximum leveraged real estate is now telling you to dump the dollar for gold and silver.  Smells like a great mid-term top-picker to me.  The "gurus" all tend to be right just enough for everyone to think they are gurus, then are proven wrong.

To conclude, we are forecasting a rise in the USD index to above the 95 level, coupled with a significant (probably more so in percentage terms than the last one) decline in stocks.  Our recommendation continues to be to liquidate stocks and risky bonds as soon as possible, and hold cash and short term treasury bills that can be sold quickly for the time to buy stocks and other assets.  For the more daring investor, finding several weak sectors of the economy (especially in deflationary times) and short-selling the shares or buying LEAPS against the weakest companies is recommended.

Full Disclosure:  While I own precious metals from years of accumulation, and generally favour silver much more than gold, I have not purchased any physical metals for almost 12 months, and do not plan to until a major correction in dollar terms (est. <$8/oz for silver) has occurred.  I own LEAPS on almost all of the major US banks, several commercial real estate companies, and Barrick Gold.  I also have transferred over 50% of my portfolio in cash form into short-term US treasury bills.

Remember, is the opinions and trading activity of the author only.  Any investment decisions you make are your sole responsibility.

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