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Monday Morning Quarterback: Perception and Reality


What's true about crude and the dollar?


"They gave me my command, a checklist, a target and a button to push. All I had to know was how to push it, and they'd tell me when. They seem to want you to know why."
--Capt. Ramsey, Crimson Tide

We often offer several tactical suggestions in Minyanville.

You can learn a lot just by watching.

The reaction to news is more important than the news itself.

We must respect-but never defer to-the price action.

The difference between perception and reality is where profitability resides.

That last point warrants particular attention. In particular, two popular myths are making their way through the market these days.

The first is that lower crude is equity positive.

Analysts and journalists have been quick to point to slippage in Texas Tea as the most recent upside catalyst. Few folks have discussed the demand destruction that is manifesting as a function of slowing global growth.

Perception is reality, we know, but perception doesn't always prove true.

Case in point, the correlation between airline stocks and crude oil-perhaps the most widely accepted misnomer in the marketplace-is a very mild negative 0.26 over a ten-year period.

It just so happened that crude plummeted into a bear market precisely as stocks were massively oversold. It was a heck of a coincidence...

Or, maybe not.

The other widely held conventional wisdom is that a stronger dollar will also help stocks find a better bid. Again, perhaps that's right.

But again, maybe it's not.

We've spoken about "asset class deflation vs. dollar devaluation" for a long time.


And here.

And here.

And here.

What those walk through is that the government created massive money supply on the back of the tech bubble. That crushed the value of the greenback all sorts of asset classes higher.

It solved one problem (spurred markets higher) but created another (and built the debt bubble along the way). A snapshot of the S&P, CRB and DXY illustrates this point.

Click to enlarge

It is dangerous to blindly believe that a stronger dollar would be a net positive for asset classes.

Just like the knee-jerk reaction to lower crude was to bid stocks higher, however, the same initial reaction could again prove true.

Timing, as they say, is everything.

I don't profess to know the tipping point-much as I don't know when lower crude will be perceived as a negative-but remaining conscious of that dynamic and educating ourselves in kind will better prepare us for what's to come.

Particularly as the massive downtrend in the dollar that's been in place since 2002 has now been breached.

You don't need to know all the answers, Minyans, but asking the right questions is surely a step in the right direction.

Or, as Mr. Practical mused Friday on the Buzz & Banter:

A weak dollar propelled stocks up for six years. As the Fed inflated the money supply with debt, people took the debt and bought stuff.

Now the repo system is broken and the Fed cannot inflate the money supply.

In fact it is deflating.

As it deflates, debt denominated in dollars is destroyed.

As the debt is destroyed so is the dollar and it becomes dear.

So the strength we are seeing in the dollar lately is not good.

It is not from a strong economy in the US but a weak one.

Always check your premise and think "why" things are happening.

Yes, oil is down. But it is down because demand is falling rapidly and the dollar is now strong due to debt destruction and deflation.

Risk is growing exponentially now and Minyans need to be very careful.

In this case a strong dollar is very bad for stocks.

Dude that's crude!

With that said, respected and digested, please keep an eye on crude $110.

If it gets there on a straight shot this week, it'll be a defined risk level with which to play for an upside Snapper.

I'm still sensing par ($100) into the election but that destination, if it is to occur, will pale in comparison with the path that we take to get there.

Again, a picture of crude is worth 1000 words.

Click to enlarge

Some Random Thoughts:

  • While a rally into the election wouldn't shock me, I'm taking that journey one step at a time.

  • Along those lines, S&P 1292-the triple top we closed above on Friday-is the tightest near-term bovine backstop.

  • Where do we have room to run? S&P 1350 is a trend-line that sits across the lower highs that have been in place since October and that's as an intuitive level as any.

  • Red beans in Friday's green sea included Wachovia (WB), Altria (MO), Nokia (NOK), SunMicro (JAVA) and WaMu (WM). Keep an eye on them if and when the worm turns.

  • We know that as go the piggies, so goes the poke so watch the financials even if you're not trading them.

  • My sense? The fourth higher low is a positive technical construct and paves the way for the continuation of the counter-trend rally.

  • I would caution, however, against blind ambition. This is a bear market rally, one that could conceivably last for a spell but in no means are we out of the woods. Take it for what it's worth and do so through the lens of risk management rather than reward chasing.

  • While a lower reading in the VXO indicates rising risk through the lens of complacency, a break through 21 would seemingly trigger dandruff in the angst-o-meter (which could pave the way for another leg higher for stocks).

    Click to enlarge

  • Duck, Duck, Goose! Visa (V) and Continental (CAL) were proof positive examples on Friday of the benefits of a "hit it to quit it" trading approach.

  • I will never tire of listening to this song.

  • Lest you pitied the fool, gold is down 9% since the Mr. T Gold Indicator gave it's latest sell signal.

  • Have a great week, Minyans, and hit 'em where they ain't.


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