US Dollar watch Summary - March 7th, 08
Rates across the Yield Curve are hitting levels of fear and flight to safety last seen at the Oct 02 lows. This level of fear coupled with breadth divergences raises the possibility of a one month recovery rally in Equities like in Oct 02, or a further decline that should end in a Panic near one of the next possible Cardinal Moons of Mar 21st and Apr 5th. Since Rates are likely headed higher into Summer 08 for the next PI/PEI 13 month cycle high, we are likely to see a turn around in the US Dollar in Spring 08. This turn around in the USD index will most likely cause a pullback in Commodities and bring premature calls of the end of the CRB bull. Equities should also benefit when the US Dollar makes a low, since depressed Equities will appear doubly attractive to foreigners with a low USD index that is rising and adding currency gains to their returns.
Rates near all-time lows
The 3 month Yield dropped to the 2002 level of 1% this week, while the 5 year Yield is testing the Oct 02 and Jan 08 lows, showing a healthy dose of fear and flight to safety. However the 5 year Yield is showing a quick 7 waves down to the PI/PEI 13 month cycle low of Jan 08 thus increasing the probabilities of at least a short term reversal. The 30 year Yield is already well off its Jan 08 lows, and Rates could rise until the next PI/PEI 13 month cycle high near June 08.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Equities testing the January 08 lows
The SPX is testing its 1982 uptrend with the Oct 02 and Mar 03 lows, and considering the amount of fear and flight to safety is similar to the Oct 02 lows, we could see a recovery rally soon. The alternative as shown by the SPX / VIX ratio is a 10% panic move lower to finish this wave down by taking fear and flight to safety as high as the March 03 lows. Panics are rare events, but the conditions facing the US financial system are not ordinary, and the possible Cardinal Moon dates for such a Panic would be the Mar 21st Full Moon, and Apr 5th New Moon.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Breadth is showing divergences
There has been 3 major waves of selling since the July 07 high, and as shown by the McClellan oscillator, each one is seeing less issues participating in the sell-off. While this pattern can certainly change and see the McClellan oscillator head lower to the Aug 07 levels, it could also turn up and give us a recovery rally. The VIX also shows that each wave of selling failed to produce more fear than the first Aug 07 lows, and the current re-test of the Jan 08 lows is done with a lower VIX. We can also see the effect of the PI/PEI 8.6 month cycle on Volatility, suggesting some relief in fear before the next 8.6 month cycle high in Summer 08. The Rule of Alternation also suggests that the next wave of selling into the Summer 08 low, will be more subdued in fear and probably not as vicious as the first quarter 08 decline. While both of these indicators are oversold and showing divergences, they do not preclude a panic move down to make them more oversold like in 2003 or 1987, so be prepared.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
US Dollar making historic lows
The US Dollar is on Panic watch again after failing to hold the Dec 07 lows as expected in my Jan 1, 08 forecast. How low it goes is always difficult to predict but the 72, 70 and 65 levels are possible targets for this 4.25 year cycle low. Since the Euro is close to 60% of the US Dollar index, it makes sense to look at the DM/Euro long-term bull market geometry for clues. While an ultimate target of 170 is probable, we could certainly have a pullback like in 1988 before we attain it, and this level easily supports a 0.65 target low for the USD index. However, the recent rise in long term Rates and the possibility of even higher Rates into Summer 08, will eventually support a US Dollar low. This is likely to be just a recovery rally in the US Dollar, and yield to further lows near the next 4.25 and 8.6 year cycle lows near 2011-12.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Gold and Oil making all-time highs
With a US Dollar making new lows it comes as no surprise to see Gold and Oil head higher as well. However since we are expecting a Spring 08 low in the US Dollar, we should see Gold and Oil pullback sharply as soon as the USD index turns around. Oil and other Commodities should come down more than Gold and Precious Metals, because their fundamentals will deteriorate somewhat with slower growth. However the fundamentals for Gold and Precious Metals will actually get better as central banks continue to inflate by pushing credit to avoid a major collapse of financial systems. This Spring 08 pullback in Precious Metals will likely be a great buying opportunity for much higher prices as the situation gets even worse into the next 4 and 8.6 year cycle low in 2010-11.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com