Monday, October 26, 2009

Trend Reversal on Dollar Strength?

As perverse as our economic system and financial trading regimen (the stock market) has become, today's action should have surprised none but the greenest rookie investor. Stocks hit triple tops (at Dow 10,100 and S&P 1100) in the past two weeks, and the reversal has been underway since Friday, when stocks took a nosedive.

Monday's early gains (Dow up nearly 100 points) were erased in one swift movement between 11:15 and 12:10, when stocks went from close to their highs of the day to the lows of the session, conveniently blamed upon strength in the US dollar, which rallied sharply against a basket of currencies. The dollar move was well telegraphed. Being short the dollar was one of the most overcrowded trades seen in the history of the market. Sooner or later, this condition was bound to unwind, and today was probably just the beginning - or, more to the point - just another data point on the way to eventual dollar strength, the demise of gold and the stock market.

Dow 9,867.96, -104.22 (1.05%)
Nasdaq 2,141.85, -12.62 (0.59%)
S&P 500 1,066.95, -12.65 (1.17%)
NYSE Composite 6,960.09, -106.71 (1.51%)

Simple indicators confirmed the oversized downside. Declining issues beat advancers handily, 4796-1687. The bias was evident in the new highs-lows, in which the highs only surpassed the new lows by a score of 262-63, one of the smallest margins in months, especially important against the backdrop of last year's meltdown and easy comparisons to today.

Volume indicated more selling to come, at elevated levels.

NYSE Volume 6,480,251,000
Nasdaq Volume 2,344,048,750

Commodities were a major part of the story, erasing outsize gains from the past few weeks. Oil tumbled $1.82, to $78.68. Gold slid $13.60, to $1,042.80. Silver fell 63 cents, to $17.10. Once again, there is no denying deflationary pressure.

Tomorrow marks a day with more earnings from major companies, though earnings season has quickly become the sideshow as investors await Thursday morning's preliminary release of 3rd quarter GDP from the federal government. Prior to that, though, durable goods orders from September, the Case-Shiller Home Price Index and October consumer confidence numbers will move the markets.

Probably not overtly stated, there is more angst and aggravation with government meddling, especially with Barney Frank and the Fed's attempts to define regulations around "too big to fail" companies, than any financial commentator is willing to admit. The threat of government takeover of individual businesses is a threat the market will not handle kindly.

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