Yellen Dousing Dollar & Stocks

After a big day for the bulls on Tuesday that did not close above the levels I spoke about to cause a spurt, stocks reversed on Wednesday and it looks really ugly on a chart. Bears will point to similar reversals at the major peaks in 2000 and 2007, which is true, but these kinds of reversals also occur routinely throughout a bull market. In analyzing their predictive power, they certainly have led to some short-term weakness, but the longer the time horizon, the less effective they are.

With Janet Yellen renewing her warnings that the Fed will raise interest rates for the first time since 2006 on December 16, the stock market is looking a tiny bit tired. The odds favor a very mild 2-4% pullback to set the stage for Santa Claus to come calling. This is a good time to prune and make sure you love what you own.

I am sure there will be lots of talk about the enormous rally in the Euro (fall in the dollar). It became a very crowded trade, especially in the hedge fund space (sheep & lemmings) on a leveraged basis. I do not believe the dollar trade is over, not by a long shot. I still think the Euro is heading to all-time lows below 80 by 2018 and the Yen will drop by another 25-50%. This is a shake out to rid the trade of weak handed holders.

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Getting Anywhere?

Early Monday I wrote about the market setting up for a bounce. And that was certainly the case on Monday. Tuesday, however, was a different story as stocks gave back all of Monday’s gains and then some. Wednesday’s solid action, once again, puts the stock market on bounce alert.

I keep using the word “bounce” instead of rally because it looks like there needs to be some more work on the downside before the current pullback wraps up. With each successive red day, the markets seem to be rebuilding the wall of worry necessary to begin the next meaningful rally. The problem is that this does not happen overnight.

Stocks are “supposed” to make some upside headway right here and now. Treasury bonds are “supposed” to pullback right here and now. Gold is “supposed” to rally right here and now and the dollar is “supposed” to decline right here and now. That’s the short-term scenario, some of which I positioned clients for while some isn’t worth the risk.

I am still keenly watching which sectors lead the bounce and which cannot get off the carpet. Right now, very few look enticing for more than a quick trade.

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