Thursday, May 12, 2011
Dollar is King
Dollar is king and Commodities its Slave in 2011
The inevitable periodic sell offs in the general stock markets indiscriminately hammer all stocks lower. But they pose a special magnified risk to commodities stocks. In addition to weighing on this sector directly, stock sell offs ignite fast US dollar rallies. This rapidly drives dollar-denominated commodities prices lower, amplifying the selling pressure faced by commodities stocks.
I believe that the market is a giant discounting mechanism. The market discounts news, political variables, and the future supposedly. It is hard to know if the future is actually priced in, but the experts say that it is as do the academics, therefore we might as well consider it fact else be thrown to the proverbial wolves. Can’t believe I'm about to say this, but I believe the US Dollar Index may be setting up to rally here.
A rally in the US dollar would be somewhat contrarian as most people are expecting a pullback. I'm not trying to imply that the US dollar is going to rally for the next five years. I'm trying to point out a short-term rally in the dollar is possible right now based on the daily chart. I would urge caution for those who are leaning heavily into shorting the dollar as it could backfire, particularly if gold, silver, and oil are unable to rally on dollar weakness.
So when the stock markets are falling, the dollar is surging, and commodities prices are weakening, Wall Street endlessly declares that commodities stocks are falling for fundamental reasons. With lower commodities prices, their profits will deteriorate. Provocatively, you usually hear bold declarations that the secular commodities bulls (or “bubbles”) are finished during these SPX-sell off events. This naturally leads to a really-negative environment for commodities stocks. They are often beaten to a pulp.
This probably sounds depressing at this point, but it really isn’t at all. Our goal as speculators and investors is simple, to buy low and sell high. In order to buy low, we need sell offs periodically to drive commodities-stock prices low enough to be relatively-cheap bargains. SPX sell offs, which are inevitable, healthy, and necessary to keep sentiment balanced, drive the best buying opportunities ever seen in this entire commodities-stock bull. These selling events should be gleefully anticipated!
Sell in May and Go Away.
Summer Cool Regards
Sr Vice President & Head Equities
wiTdom investment advisory.