Can The Markets Defy Gravity Again?
Nearly every trading day the major stock indexes will decline before the noon hour. This decline in the major stock market indexes usually leads to a light volume rally that lasts into the close. For example, yesterday the major stock indexes dropped sharply lower at the open only to find a low after the first hour and trade basically unchanged by the closing bell. This type of activity occurs nearly every trading day since December 19, 2011 when the Dow Jones Industrial Average (DJIA) traded as low as 11,231.56. Today, the DJIA is trading around the 12,700.00 level which is close to a six month high.
The catalyst for the stock markets is the cheap money by the central banks and the better news out of the European Union. In my opinion, the falling U.S. Dollar Index is the real catalyst for a higher stock market. You see, the U.S. Dollar is the world's reserve currency, therefore, if you live in China and want to buy oil or copper you must use U.S. Dollars to buy it. When the U.S. Dollar declines everything that people use such as oil, copper, silver, rice, and other commodities will inflate and trade higher. Just look at a chart of the U.S. Dollar Index when it trades higher and you will see the stock and commodity markets tumble lower. Perhaps one day this inverse relationship between the equity markets and the U.S. Dollar will change, however, I would not bet on that happening anytime soon.
The major stock indexes are overbought and extended in the near term. The trading volume has been nothing short of pathetic during this rally. The poor trading volume could be problematic down the road as this signals a lack of real conviction. This type of action tells us that traders should enjoy the inflation rally while it lasts. Remember, nothing goes up forever, or in a straight line. The markets can only defy gravity for so long.