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Banks, Sentiment and the Long Term Dollar / Equity Correlation

Recs

50

August 25, 2009 – Comments (8)

Interesting Day, and a potentially important day. Today could be Primary 3 Day!. But instead of me putting up a bunch of charts, counts and indicators of the major indicies (which everybody else is doing and probably better than I would anyways), I wanted to look slightly off the mainstream. Such as last night with A Look At Some of the Asian Markets. I want to look at some more canaries in the coal mine.

The original post can be found here

..... Continued in Comments Section ......

8 Comments – Post Your Own

#1) On August 25, 2009 at 12:36 AM, binve (< 20) wrote:

Financials

And these guys are another canary. Albeit not a very original one. Because everybody watches / trades financials. But most do not do it from a big picture perspective. BAC was a 5-bagger if you picked it off the very bottom in about 5 months. People trade and gamble with financials, people are very emotional and hopeful about them.

This alone should tell you that financials are just another casino play right now. Just like the SSEC (108% off the bottom). Most financials are multi-baggers and the XLF and BKX are up over 100%. And you can sit there and tell me it is because they are healthier or that the strongest have survived .... BS. I still maintain that finanicals are volatile garbage and are the cancer of the economy. And these moves do nothing to dissuade my opinion that this is just speculative casino gambling in these stocks.

And much like the SSEC (a huge casino index), which peaked earlier this month, the casino nature of financials should show weakness ahead of the rest of the markets also. BKX and XLF still made higher highs with the rest of the markets, but good old Goldman Sachs has not been. Did the Goldman Sachs "reign of terror" end on Aug 6th? Stay tuned to find out.









Sentiment

Just another look at charts I have shared a few months back. BPSPX notched over the long term resistance line, which is exactly what we expected it to do at the end of P2. So that is another "X" on the checklist for evidence of a P2 top.

Next is a look at the CPC. Option investors were already in uber-bullish territory. And then at some point today I believe the CPC stabbed down to 0.3 !!!!. Yeah, go bulls! And then if you look at the bottom of the chart, the CPCE (equity only CPC) looks even more "bullish".

To modify a Billy Madison quote: "Toppy, toppy toppy. No more toppy". :)

So while the price in most of the indicies did not send up fireworks screaming "manic blowoff buying spree, P2 is done!!", a lot of the sentiment indicators are saying exactly that. And since the end of P2 should be technically weak but highly euphoric, just put another "X" on the P2 top checklist :)





The US Dollar / Equity Relationship

Okay, I am probably going to rant a bit here (yeah, big shocker binv) :). But every deflationist is screaming about a bottom in the dollar and how a strong dollar will bring about the end of the equity rally.

... Uhhh, yeah. Good luck with that theory.

Because it doesn't make any sense and is completely unsupported by an examination of the long term relationship between Equities and the US Dollar Index.





---- DISCLAIMER: binve IS A LONG TERM DOLLAR BEAR ------
Short term is all noise. And the current dollar weakness is fueling the equity rally. Long term, equities will go down (due to poor fundamentals) and the dollar will go down (due to confidence crisis) together (such as 2007-2008 and numerous other occasions)

By and large, there is **far more** positive correlation between the Dollar and Equities than there is inverse correlation. They both go up and down together as evidenced in the chart above.

However, many others including myself, have observed that the "weak dollar" is currently fueling the the equity rally right now. So why the discrepancy?

Because you need to realize that we are still in the aftermath of the Greatest Deleveraging Event in History (2008)!

During the meltdown of 2008, everything was sold / redemeed for the relative "safety" (used exceptionally loosely) of Treasuries: shares in hedge funds, commodities, stocks, etc. As such there was a massive dollar repatriation. The dollar didn't gain value because it was strong! It did because it was "in the way" (you have to buy dollars in order to buy treasuries, it is sort of a necessity that way).

In the ensuing months we have seen the Fed ream bondholders through ever more massive QE salvos, intentionally destroying the "value" of US Treasury debt and the US Dollar. Since that time, money has been moving back out of Treasuries (putting downward pressure on the dollar) and into more speculative endeavors (the stock market). You can see here that there is not a "if the Dollar goes down then Equities must go up" relationship here. Money was leaving treasuries and equities were oversold so they were bought. That's it. Another force at work is the fact that the weak dollar and the oversold nature of equities a few months ago made stocks attractive to relatively stronger foreign currency holders, who could "get more bang for their Euro" so to speak.

You can see that the current inverse relationship between the Dollar and Equities is a product of a very particular setup and is not a given. In fact, the relative valuation of all of these asset classes (Treasuries, Dollar, Foreign Currencies, and US Equities) has shifted a lot the last few months. Anybody expecting this "status-quo" relationship to persist much farther into the future is going to be rudely surprised.

So what about the future? Are the deflationists right? Does all the world's money rush back into Treasuries and the US Dollar during the next crisis? Any claim of a "strong dollar" is bunk. The Fed has made it abundantly clear that QE is not going anywhere and they are getting more aggressive with Treasury purchases, not less. So anybody who thinks that US Treasury debt will still maintain the iron-clad safe-haven status in the future.... well, I have a Bridge in Brooklyn that I think you would be very interested in!!!

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#2) On August 25, 2009 at 4:53 AM, kaskoosek (37.09) wrote:

+1 rec from me.

 

Good work, I think this time around the bubble will be gold.

 

Can some one say gold to 3000????? 

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#3) On August 25, 2009 at 7:37 PM, jesusfreakinco (29.02) wrote:

Rec +38.  Thanks for the post.

JFC

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#4) On August 25, 2009 at 7:59 PM, binve (< 20) wrote:

kaskoosek, Thanks man! And yeah, that is not too far from my long term target for gold :)

jesusfreakinco, Thanks JFC!.

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#5) On August 25, 2009 at 8:13 PM, topsecret09 (44.31) wrote:

Great charts... very clear to me looking at these that the financials,and In my opinion,looking at the big picture the  broader market may have topped. I use technicals to confirm EVERY trade that I make. These charts are crystal clear,and very bearish Indeed. This rally Is a little long In the tooth for me,and the banks have driven most of It. Thanks for the post.... TS        

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#6) On August 25, 2009 at 9:04 PM, madcowmonkey (< 20) wrote:

And you can sit there and tell me it is because they are healthier or that the strongest have survived .... BS.

Not too many people are really saying that.....BS, but it is BS. Nothing changed on their books, besides the fact that they are holding stuff off of the books for a little while is all. I get a kick out of people saying that financial stocks are there favorite and that they just started investing this year. No wonder they are your favorite eh? The financials are just so manipulative, why bother with em. People have to realize, now they need to sell this garbage at this price to keep the gain. Have fun with that one. 

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#7) On August 26, 2009 at 12:08 PM, binve (< 20) wrote:

topsecret09, Thanks man, I appreciate that!

madcowmonkey, I know man, I still get a lot of arguments to the contrary, that banks are much healthier.

But I look at and see the next wave of defaults (Option-ARMs) and nobody is talking about it. I have brought it up several times on my blog and it gets very little play. People remembered it for about a weeks after the 60 minutes special last year and then promptly forgot.

Then after option ARMs, people are starting to default on regular mortgages. Not subprimes, not teasers, but good old 30 year fixed deliquency rates are going up. And very few people are talking about that too.

Financials still have **huge** mortgage exposures and the consumer outlook is not good. Which makes mortgage exposure even more risky in the future.

I maintain my BS call on finanicals :) Thanks man..

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#8) On August 31, 2009 at 8:03 PM, skeptic86 (87.97) wrote:

Brine,

Great post. I have a question about the $USD. What about the QE of other countries? If you think the USD will loss value vs other currencies, should you invest in US companies that export products like Boeing and GE?

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