Tuesday, July 24, 2012

The Euro, the Dollar & market update

With the recent vicious descent of the Euro I thought it appropriate to take a ling term view of that currency and also our Dollar: 

Take note that the MACD Histogram in the upper panel belongs to the Euro and seems to show a positive divergence from the negative price action.  But we need to remember that these are monthly charts and even if the divergence ends up being genuine, due to the time frame it could take months for the divergence to play out.

The big "take aways" from both charts are:

1.  The Euro is fast approaching it's 2010 low of 119.13 and if it drops below that low the next target is the 116.45 level.

2.  The Dollar has penetrated a multi year downtrend line going back to 2002 and has very little resistance until it arrives at the 88.75/88.90 area (It is presently at 84.00).

A stronger Dollar means weaker equity and commodity prices.  The momentum behind the descent of the Euro and the rally in the Dollar is foretelling a significant sell off is in the offing.

Treasuries are also giving us the same message:

Here's the iShares Barclays 20+ Year Treasury Bond ETF; another all time new high!  Treasuries are inversely correlated to equities and commodities.

These charts speak to deflation.

I stated in my commentary on Sunday that the market is testing the resolve of the European Union.  With Spain now "on the ropes" contagion is rapidly spreading to Italy.  As a matter of fact, yields across all the Euro zone member states rose today with few exceptions ( Germany's two year Bund, Finland and Netherlands two year bonds, and the UK yield curve).  And it looks as though Greece may not get the funding it needs to stay afloat which means a Euro exit. 

In this country corporate earnings have been almost uniformly disappointing if only because any improvement in earnings has been on falling revenues.  UPS and APPLE are two global bellwethers that disappointed today and as such, are signaling a weakening global economy.

The only bright news of the day arrived at about 3:10PM EST when the Wall Street Journal broke a story citing inside sources at the FED that they might move as early as next week (July 31-Aug 1) to deploy another round of QE (hopium).  The Dow Jones Industrial Average, which was down the better part of 200 points retraced half it's losses by the closing bell. 

In after hours trading the S&P Minis are down another 6.5 points.