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My
dad gave me one dollar bill This poem from Silverstein's children's poetry book, Where The Sidewalk Ends, reminds me of what happens to the Dollar. While there're more of it out there than ever, it's worth a lot less. The US Dollar Index - which provides an indication of the international value of the Dollar by averaging the exchange rates between the Dollar and six major world currencies - has declined 28.44% in the past 3.5 year, from the January 2002 high of 120.51 to Friday's 86.58.
And, as you may've noticed, 85.25 also happens to be where the 200-day moving average is. Therefore, should the Dollar Index drop below this green line, it would break all these supports except the $80.59 decade bottom. And that bottom may not withstand the test this time as more liquidity is going to be pumped into the system in the aftermath of hurricane Katrina. Ironically, financial market thrives on liquidity, and the market correlates inversely with the Dollar due to our gigantic budget and trade deficits.
As I wrote in my 09/08/2005 Thursday Update that although M3 increased by $59.2 billion for the week ended Monday, 8/22/2005, that wasn't intended for the hurricane Katrina victims. The National Hurricane Center didn't issue its initial Tropical Depression Twelve statement till Tuesday, 8/23/2005. In addition, the Fed's repo totaled $53 billion during that calendar week (8/22 - 8/26) was the largest sum I've seen since I started tracking the Fed's temporary open market operations. That too was not meant for the hurricane victims. Katrina didn't make its first landfall until the following Monday, 8/29/2005. And, as I've mentioned before, while no one in the government sensed the ever so clear and present danger of hurricane Katrina moving north, someone sensed the imminent danger of both the market and the economy going south. And, so while the Fed's advocating fighting inflation on one hand, it's pumping more money into the system on the other hand. And, what this super charge of liquidity didn't do for the human suffering in the South, it did quite well for the financial market up north. Chart 2 below shows the market's fall was stopped right on cue, and the PVO (Percentage Volume Oscillator) also started rising from the 8/29 bottom. The rise of the PVO in an uptrend indicates an increase of buying volume. Fueled by this drastic increase of buying volume, the S&P then proceeded to rise above the blue 9-day moving average line on September 1. The PVO eventually moved into the positive territory, above zero, on September 7. Stopping the fall is one thing, but it takes a lot more than just the liquidity to show such a strong reversal that took only about a week to negate the preceding downtrend that lasted for almost a month. It takes positive expectations, or sentiments, to entice large buying volume.
Financial market is driven by expectations - expectations of possible future rewards for buying or selling now. There has to be uplifting expectation or sentiment to fuel this recent liftoff. This type of positive sentiment is what makes the money (and the world) turn. And, when the money turns, it creates velocity. The velocity of money that's generated from all the lending and borrowing activities is what keeps our financial economy going. And, when the economy's going, so goes the stock market. After the 9/11 terrorists attack in New York, the seasonally adjusted M3 increased $180.5 billion for the week ended 9/17/2001. The S&P went on to make higher highs and then detoured for 7-8 months before resuming its downtrend. There's similar expectation this time that helped catalyze last week's rally. The market's expecting this type of liquidity, if not more, in the aftermath of the Hurricane Katrina catastrophe. And, this "uplifting" sentiment can best be manifested on these 2 indicators that I've shown you repeatedly in the past. In last week's Sunday Chartmentary, I detailed how the fate of the market rested between the red and the blue lines that I drew. I mentioned that since VIX is a contrarian indicator, the blue support line is actually the market's resistance. VIX staying above this blue line is what prevents the investors from buying more shares. On Friday, Sep. 8, VIX closed below this line for the first time since Aug. 15. This indicates a positive sentiment towards the market.
Next is the Ratio of Wilshire 5000 index to CBOE Total Put to Call Options Ratio. For more detail about this technical indicator, please review my Thursday Update on 8/4/2005. When I posted this chart on Aug. 4, the 9-day moving average (blue line) was just crossing below the 21-day moving average (brown line). That indicated the presence of the "fear factor" in the market. On Friday, Sep. 9, the 9-day MA bolted above the 21-day MA with conviction. This crossover indicates another bullish sentiment.
Now that we're aware of what fueled last week's market rally, I'd like to caution anybody from turning bullish prematurely. For one thing, one single day of technical event occurred on Friday, as show on Chart 3 and Chart 4 above, does not make it a trend. VIX on chart 3 actually spent part of the day above the blue support line, and Wilshire 5000-to-CPC Ratio still had not moved above the previous short-term low that occurred on June 27 - see red circles on Chart 4. Back in 2001, the price of oil was only in the $20 range, and the price of Gold was only in the mid $200's. Personal saving as a percentage of disposable income was at 2.3% then comparing to only 0.3% in the 2nd quarter of 2005. The energy cost and the low savings rate lead us to the next important subject, the consumption. As I've repeated in the past, even if we don't know anything about anything else, all we would ever have to know is the consumption. The revised 2005 2nd quarter GDP report (preliminary) just released on 8/31/2005 still shows personal consumption as 70.05% of the GDP. This S&P Retail Index chart (Chart 5) shows no where near as bullish as the S&P chart (Chart 2) above. It still has 30.47 points to go before it reaches the July 29 intraday high of 489.34. The black thick ADX line in the lower pane is not showing any uptrend momentum while the red -D line hovers above the green +D line.
And finally, last week's strong market action shows a very strong reaction to the expectation of another post 9/11 like liquidity pump. In fact, it might've been strong enough to be considered an OVER-REACTION. The danger of a great expectation not met is the great depression. And, it's not out of the question that after giving it much thoughts over the weekend, the market participants may come back this week realizing that they had over-reacted to nothing but a great expectation. Time will come when the bearish bias should be lifted. It may come this week, next week, next month, or next year. It's just not now, yet.
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INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
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