To 2% or not to 2%

This is Warren Buffet’s righ-hand man.  Anything he writes, I read.

“The country is understandably depressed — mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.”  - Charlie Munger, Vice Chairman of Berkshire Hathaway Inc.

 

The USD/JPY has often been thought of an indication of equities risk aversion…

Has all the negativity of the stimulus plan unveiling been reacted to? Is it — at this point in the media and public — been fully discounted into price? It can be agreed that 1) we’re going to spend over a trillion dollars of taxpayer money and 2) we’re going to do “something” versus nothing. There are two things that can be of benefit and that is to not do more damage to the economy and inject optimism via capital into the economy but more specifically the U.S. consumer. If consumers think the economy is turning around, they will buy, and that’s is what’s going to improve the economy. Not better data. Data is lagging. Consumer psychology will be leading. Because of this, the consumer will feel better before the data looks better.

I was speaking to a friend of mine who works for a fund and decided that in an “alternate universe” Sec. Geithner announced every last detail of the plan and the equities market sold off all the same. The reason being is that Wall Street ran the market up (discounted) the announcement and the only surprise would have been 1) no announcement or 2) that the U.S. won some intergalactic lottery and thus paid off the debt. In other words, no matter what, the equities markets were going to sell off.

I mention all this because it has a direct effect on the USD/JPY. Is the current price action the beginning of a sideways/bottoming cycle? Let’s dissect the daily chart. Starting with the GRaB charts, there is confirmation of the sideways cycle transition on the daily with the 34EMA Wave indicator moving sideways indicating a transition to an accumulation or distribution market cycle.

Currently the Fibonacci levels on the daily USD/JPY showcase a solid double bottom at 87.10 to 87.12 which can at very least establish a short term floor. The ceilings are identified by the 25%, 38.2% and 50% Fibonacci retracement levels.

One floor and multiple ceilings could contain both further upside and downside on the USD/JPY as there are significant arguments that the negativity in the Dow has been fully discounted. If the 87.10 to 92.25/93.83 area is going to be the consolidation range going forward then that indicates that the Dow will consolidate here as well.

The Dow is rallying because of an expectation of a bailout/stimulus package being presented on Monday, the 9th.  As prices rally into the resistance of what has been a formidable Wave, it’s likely this is a classic “buy the rumor, sell the news” scenario and traders should take profits on this move, not initiate a long position.

 

(subtitle:  Why fundamentals are second to price)

I have been talking about comparing markets a lot lately.  Mainly because as a market rallies, fundamentals tend to line up to explain why and ofcourse as a market falls, fundamentals line up to explain why.  Understand that I am not *bashing* fundamentals but let me give it to you straight.  Fundamentals, like news, can be spun and it is spun.  It’s dizzying.

For every piece of positive news or data there is a negative bit or two floating out there as well.  It’s the process of “discounting” that tells us which is foremost in traders’ and investors’ minds. Discounting is what has been “baked into the cake” or already factored in.  This is most commonly done in expectation of the most likely outcome.  The markets are always forward looking.  I think this is why futures traders are especially well-equipped to trade any market.  We know that we’re not trading what the value of anything actually is but rather what it is expected to be in the future.  Think of price this way:  Most everything you know and everything you don’t know about the surrounding fundamentals has been to some is reflected in the price you see on your chart.  Charts plot market psychology:  fear and greed.  That’s what the value of anything reflects.  Uptrend, greed.  Downtrend, fear.  It’s not much more complicated than that.

When I say “comparative market” that means that one market is always being judged against another.  This means strength or weakness is based upon how it is doing against another market.  So that brings me to the U.S. Dollar.  Yes, the U.S. is printing dollars like we’re never going to run out of green ink.  Yes, the current 0.25% rates is very low, second only the Japan amongst major central banks.

There are plenty of “reasons” for the strength of the dollar but there are reasons for weakness as well, but the reasons usually come after the move…think about that. Prices will always show you the trend, short and long term, and it’s the ONLY way to determine what is currently being discounted into the market.  Frankly, the most you really need to know is whether the news and fundamentals being discounted are bullish or bearish.  Singling out particulars, unless these are data events, is very difficult and hit or miss at best.

I’ll go long term here (weekly) on this view of the dollar.

It’s up because by comparison the dollar is looking good compared to the pound and euro…and now even the yen. 

 

“Dogs are supply-siders, they respond to incentives.” - Larry Kudlow

 

Long thought of as a leading indicator — perhaps more accurately a thermometer for the U.S. economy — UPS (yes! the big brown truck people) have approximately 6% of the U.S. GDP in their pipeline at any given time.

Keep an eye on big brown, not the financials, if you’re looking for the timing on the turn around.

 

“The stock market is fantasy footbal times 100.”   - Al Michaels

 

The gold and dollar have been moving together for most of January. The uptrend that the dollar has been enjoying has been accompanied by the gold market rallying to the resistance level created last September/October.

(click on charts to enlarge)  It’s a interesting global situation whereby the collective equities markets are suffering across the board, currencies are devaluing, yet the dollar — by comparison — looks good, but the global credit contagion has people running to safety and thus to gold.

You mix that all up and that gives you the chart of gold and the dollar moving higher together.

This could be changing though.  Gold has reached a ceiling that could put an end to this.  Prices have reached an area where there is likely to be a shift in power from buyers to sellers - that’s it the level stays intact.

Gold is the market of paranoia.  Fear and gold rally.  Heck, greed and gold rally too!  This market is the psychological pulse of investors and traders.