7/27/09 (Dollar Slips - but a New Hope?)

Traders,

We continued the push higher into Friday last week, but we did see a couple of stocks miss – the two big ones were Microsoft and Amazon. When you have a breakout (to the upside or downside) and there is no resistance or support – eventually the acceleration of the move slows and begins to consolidate to find that new support or resistance level. That consolidation period is a combination of the big fish being done, some profit taking, and a pause looking for the next undervalued sector or product.
The big movers and shakers have for the most part reported earnings – and they have been better than expected. Forward guidance has been a little mix – questions about the holiday sales and growth is still a big concern.

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Dollar slipping – but a New Hope?

With all the excitement from the 2 week massive rally in equities, the dollar has all but been ignored. The dollar has been slipping against foreign currencies and also commodities (Oil and Copper have been rallying).
The general view is becoming apparent, as I had earlier stated – we will see two types of countries emerging from the recession – those with debt and those without debt (when I speak of debt – I refer to government, consumer, and corporate – I am also not implying that a nation has NO debt, but relatively little compared to the debt burden nations). The question is can those growth nations (without massive debt) carry the nations with debt? India and China vs. U.S and the West
It is important question and it will translate into the market based on sectors and international companies. Companies like Coke, Apple, CAT have positioned themselves for growth in those nations (China, India). Apple is working on making a huge push of the iPhone into China, Coke is trying to acquire the largest juice manufacture in China, CAT’s biggest sales are in China. China has a trade surplus, little debt, almost no consumer debt, and the money is going to the bottom line.
While this is great news for many companies that have made that leap into China (and India) – there are companies that either do not have that exposure or are late to the party. One friend that I spoke to made an interesting observation – we could have some strong sector driven market growth (in equities) and at the same time remain in a rather dismal domestic economic landscape – as the consumer continues to suffer.
So what is the New Hope? In the late 90s we had the dot.com boom (and bust) that created a whole new wealth in this nation (for many it was temporary), that was quickly followed by the housing market boom (and bust) and that too created a whole new temporary wealth. There is a possibility that the next bug is the appetite for China and India growth. Even the word BRIC (Brazil, Russia, India, and China) has become a familiar term and the term is becoming synonymous with debt FREE growth. Investors are already latching on as ETFs and mutilifunds are popping up. However there is one small problem with this possible economic booster, actually there are a couple. First, unlike the Dot.com and Housing boom – consumer credit availability is gone. Most investors used margin that was leveraged off of debt (that is gone). Second, the dollar continues to slip and we didn’t face the massive inflation risk we face today – thus any gains in the Dot.com and housing boom translated to REAL buying power – which may not now be the case.
I still think there is huge advantages in either direct investing or finding companies with strong balance sheets and international exposure. But hedging that dollar / inflation risk is a new and much needed addition to any equity play.

Interest rates on treasuries continue to climb as the government auctions more money and the Fed continues to take down billions – in order to avoid an auction failure. Bernanke is doing what he can to keep rates down – but they continue to move higher.

Watch the dollar – look for international exposure – and hedge buying power.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a9y.Uzbu0hVM
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Futures Pre-market

The futures are off in the pre-market, flat to lower and below fair value. Expect a slightly lower opening.

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Support / Resistance

INDU 9000 (9000 is support, but where is resistance – after the breakout the upside is going to be about a consolidation area. – but not a support area to get long, but rather flat.)

NDX 1600 (We are right up there at 1600 – is it resistance or are we seeing a consolidation area?)

SPX 950 (950 was resistance – we broke out – will we revisit 950 – it could be a support area – but a place to get flat rather than long.)

RUT 550 (The RUT finally moved higher and got above that 540 area. Watch the 540 to 550 area.)

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Conclusion

The earnings season has created surprises, the rally has moved into 3 weeks, we have seen some mixed economic data and a couple of big companies report rather concerning numbers. However – the market perception remains optimistic and has pushed it higher. We have yet to see a consolidation area – which could create either a new support or possible resistance – we are just in lofty areas at this point and while some companies have made moves on fundamentals, others have been pulled up by the overall optimism.
My concern about rallying too fast and too high – is that the economic data, lower revenue numbers, commodity prices heading higher, keep me skeptical if we can continue to see a general market rally into the 3rd quarter. Maybe it is time to take some profit off the table, hedge those long deltas, and start looking at some value plays rather than just momentum.