Quite frankly I have found the market action of the past week to be rather confusing; I know that I am the StockSage and I'm not supposed to be confused very often, but in all honesty I have been. Let me give a quick recap of what I have seen during the last week and then offer my thoughts as to where we are today.
Last Friday morning the US dollar ($DX_F) was attempting to stage its most impressive rally in months when the third most powerful man in global financial markets, FOMC Vice Chairman and NY Fed President William Dudley, spoke in Puerto Rico and stated:
"A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course"¦..economic conditions have improved in the past year. Yet, the recovery is still tenuous. And, we are still far from the mark with regard to the Fed’s dual mandate. In particular, the unemployment rate is much too high."
These comments caused a sharp reversal in the dollar as clearly illustrated by the chart below:
(thanks to Greg Harmon for providing the chart above)
This week new all-time highs have been made in gold ($1475), 31-year highs in silver ($40.65), and 3-year highs in crude oil ($112.58). Of course, there are structural catalysts for the recent surge in oil (MENA conflicts and stronger economic activity around the globe), however, the recent surge in commodities is largely a result of dollar weakness.
Doug Kass has discussed the idea of "screwflation" for many months. The screwflation meter has been turned up a few notches over the last week as lower income earners who have little or zero exposure to appreciating assets face higher prices pretty much everywhere they look. Marc Faber was on CNBC this morning and once again he made several excellent points, I recommend watching the entire interview.
I continue to be of the opinion that there will be not be a QE3 this year although the recent dollar and commodity action has me questioning this opinion. Would the Fed really be so reckless? With the economy clearly improving at a healthy pace and commodity price pressures heating up, wouldn't a QE3 carry with it many more risks than potential benefits?
Take a look at this chart of $SLV vs. $XLE vs. $GLD vs. $SPY over the past year. In particular, notice the action since the August 27th, 2010 Jackson Hole speech by Bernanke wherein the die was cast for QE2:
The tremendous dollar sell-off, the parabolic surge in commodities, and a US equity market that continues to hit its head up against S&P 1338 all have me pondering the possibility that an inflection point is near. The Fed may have done all that it can in terms of monetary policy stimulus and may have to pull back a bit once QE2 ends in June. There cannot be a more clear warning to the Fed that it may be at risk of going too far than the surge in commodity prices and the tumbling dollar.
Finally, the equity market has been trapped in a tight trading range the entire week and has been met with stiff resistance at the S&P 1338 level each time it has attempted to push through. Moreover, there has been a strange sector rotation out of the agriculture and energy sectors into financials and retail. Today the market gapped higher and proceeded to quickly sell-off, the early advance was led by energy names which have since faded noticeably. The recent action doesn't look healthy and makes me think that the S&P may have to revisit the 1300-1307 area in the coming week. What do you think? I will respond to all comments.
Robert Sinn is a professional trader and market analyst who focuses on multiple asset classes including equities, futures, options and currencies. He integrates fundamental and technical analysis. More »
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