Tuesday, December 8, 2009

Strong Dollar Whacks Stocks, Metals

The continuing saga that is the unwinding of the risk-carry trade on the back of the weaker US Dollar continued today in earnest as the greenback strengthened against a basket of world currencies, most notably, the Euro and British Pound. As strength in the dollar causes speculators who used the currency as free cash as it was falling to sell stocks and cover, US markets took a decidedly negative turn on Tuesday. Also adversely affected were the precious metals, which continued their quite precipitous decline.

Besides the US Dollar story, there was little else to move markets, although a report of declining same-store sales from McDonald's (MCD) and an earnings warning from 3M (MMM) helped push the Dow lower.

Dow 10,285.97, -104.14 (1.00%)
NASDAQ 2,172.99, -16.62 (0.76%)
S&P 500 1,091.93, -11.32 (1.03%)
NYSE Composite 7,056.26, -99.47 (1.39%)

Declining issues overwhelmed advancers, 4488-1987, a measure of more than 2:1, while new highs beat new lows, 217-51, with the margin now having declined for the fourth straight session from a high of 341 to today's 166, or, by more than half. Should the high-low indicator continue to weaken and eventually turn negative, the chances of a severe downturn would increase proportionately. As it is presently, the indicator is flashing only a slightly negative sign, though taken together with other indications, the market may be already past a turning point to the downside.

Volume remained consistently low, as traders seem to have already headed out of town for the holidays. Speaking of which, there are only 16 shopping days left until Christmas, and thus far, retailers have not offered any encouragement. The American consumer is spending with rarely-seen frugality this season, and the numbers may not even be good enough to surpass last year's dismal sales figures.

One caveat remains in place concerning holiday retail sales. Even though last year's figures were horrid, they may have been better than they should have been, given that the stinginess demonstrated by the banks was just beginning to take hold. More consumers were negatively affected in terms of credit during 2009 than prior to the shopping season of 2008. The financial collapse was only then a month or two old, so there was still a good deal of uncertainty and skepticism concerning the true depth of the crisis. It was only in January and February that the real impact of the financial crisis became real for many people. Bear in mind that stocks didn't bottom until March of this year, and the clanging impact of that bottoming is still resonant.

NYSE Volume 5,421,175,500
NASDAQ Volume 1,916,778,500

Commodities fell victim again to the stronger dollar, which, in the long term, is positive. Oil was lower by $1.31, closing at $72.62. Talk of testing the $70 level has been bantered about, but that is nothing but a number. The real test for oil will not occur until it approaches $65, and a stronger US Dollar should provide sufficient impetus to push it through that level down to more reasonable valuations. Yesterday, Saudi oil minister Ali al-Naimi proclaimed that the price of oil was "perfect" at $74/barrel. Today, he is likely a little less sanguine.

Gold dropped $20.60, to $1,143.40, though it has traded lower - down another $15 - after the official print at 1:30 pm. Silver was hit likewise, dropping 58 cents, to $17.79. Nearly every commodity price was lower on the day, with just corn and natural gas bucking the trend.

With just 16 trading days left in the year, the two key dates are next Friday, the 18th, which is a quadruple-witching day for options expiration, and the 31st, the final day of trading for the year. With Christmas and New Year's Day falling on Fridays, the year will end with two short weeks. The 24th will be a morning session only, with the trading floor closing at 1:00 pm. New Year's Eve, the 31st, will be a full trading session.

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