Many traders like to pick my brain and/or share information with me on a daily basis. A much-respected colleague of mine shared this information with me. Like me, he sees no reason why equities should be as strong as they are. I tell you now; it is all about the US Dollar. Almost every worldwide commodity from Oil to Gold to Corn to Coffee are traded in US Dollars. The US Dollar is considered a safe haven currency. If the US Dollar fails as a credible currency, the rest of the world goes down with it. This thought process has kept US stocks and treasuries attractive to foreign investors for years. When you invest in the USA you invest in stability. Moreover, you can do SIZE. With instability worldwide, foreign capital has poured into the US stock and treasury markets. Two months ago, when the Dollar vs. the Euro Currency was 1.04, the S&P 500 was 800. Simple division gives us a ratio of 756/1. With the currency rates at 1.15 and the S&P at 940 the ratio is 817/1. Even with the drop in the value of the dollar, the foreign investor is realizing a small profit in his US held assets. As long as the dollar continues to falter, US stocks and treasuries will look attractive to foreign investors. The shorts in the stock market will continue to be squeezed. Technically speaking the SPM could easily reach 1000 and possibly 1100 before the next 2-3 year leg down begins. There is a reason why stocks will not sit down. The weak dollar may be it.
Damn, the 1st good reason for the recent 'irrational exuberence' (on a small scale) that I've read. And it makes sense, still, I think I'll keep looking for shorting opportunities before taking on too many 'naked' longs! Thanks for the thoughts!
But doesn't it become a self-fullfilling prophecy? If foreign monies continue to pour, it makes the market seem strong. Domestic monies start coming in, the bonds players move elsewhere, and then finally mom & pop jump in on the last rally (after agonizing over buying expensive stocks all the while its going up) who are left holding the bag. The low interest rates and monetary situation make cash pretty cheap right now and more incentive to go into the market. An interest hike and strengthening dollar might pop the market, but its kind of a fool's game to call the top of this rally, rather its simply a bear market rally or a new bull. For the past month, I've known some bears who have been getting killed and simply won't go long because they know, in their hearts of hearts, that the top is right around the corner. Of course, that means that they've taken a loss while there's an opportuntity cost that "it's too expensive." Thinking that they can make a killing, the ultimate homerun, if they can short the top and ride it down for 200 pts. Don't know if this is "irrational exuberance" or whatever, but its better if the market confirms that this uptrend is over.
Hedge funds are also starting to think the worst of the bear is over ... read an article earlier today. But I too am looking more to short than go long. Upcoming week will be a down week IMO.