In the last 3 years the US Dollar Index has rallied ~19% while major commodity indices have fallen ~30%. We think Market Psychology is sensing “trouble ahead” because massive Central Bank “money printing” has created a mountain of debt…but has failed to ignite sustainable global economic growth. We think smart money is therefore leaving peripheral markets and returning to the center…seeking safety. We think this trend will intensify in the months ahead.  

The US Dollar Index is at 4 year highs while…

Commodity indices are at 4 year lows.

Short Term Trading:

Stocks:

We have previously written that September 19, 2014 may have been an inflection point in Market Psychology…a date when a number of markets reversed course as “risk off” sentiment intensified. We think that the stock market may have begun a multi-month “topping process” that will produce sharp price breaks and rallies…but not new highs.

The DJIA dropped ~1500 points from its September 19 All Time High to its October 15 lows…and then rallied back ~1000 points. We wrote last week that we wouldn’t be surprised to see it rally back 50 to 70% of the break…into the 16,600 to 16,900 range. Well…here we are at 16,800 and rising (while the DJT has rallied to New All Time Highs.) Our trading plan was to wait for the “bounce back” from the Oct 15 lows to run out of steam and then we would get short. We are still waiting. If the market rallies past the 17006 highs made October 8 (notice how the market reversed after the Oct 8 rally and fell over 1000 points in the next 5 trading sessions) then the October break was probably another “Buy The Dip” opportunity and new All Time Highs are likely. If the market fails to rally past 17000 and “rolls over” then we may get a challenge of the Oct 15 lows.

Currencies:

We stayed with our long US Dollar positions into September and then stood aside thinking that the rally had gone too far too fast ( up 12 weeks in a row.) We do NOT want to be short the US Dollar and are looking to re-enter long positions…we may have missed a good opportunity below 85 but we are still on the sidelines. Everyone and his dog is bearish the Euro (and so are we) and that makes us nervous…so we wait.

What was the biggest move this year…in a major country currency?  The Russian Ruble…down ~20% (to All Time Lows) since July as crude oil tumbled, sanctions bit and capital fled the country…how did we miss that trade?

Longer term:

Last week we wondered if September 19 was what George Soros would have called an “Inflection Point”…a point at which “the trend” changes. The “trend” we were considering was the ebb and flow of market psychology as it ranges from aggressively embracing risk to desperately seeking safety. If capital really is starting to get defensive…and we think it is…then how does that play out in the markets?

Does capital, to some degree, see “trouble ahead” because fiscal and monetary policies since the credit crisis have been unable to “kick start” economic growth…but have instead created a mountain of debt?…and if there is no economic growth then how does that debt get repaid? Or, more to the point, who gets stuck with it? Does capital anticipate that governments will ramp up the “Pay Your Fair Share” campaign and raise taxes?

Perhaps the Really Big Inflection Point comes when the trend towards the lowest interest rates of our lifetime reverses…and not because Central Banks start to raise rates…but because people lose faith in the credit worthiness of the borrowers. We can imagine the initial sequence such a “loss of faith” would take…and we think that may have begun…credit spreads would widen and yield curves would steepen…but what happens after that? Do interest rates…across the credit quality spectrum…start to rise? Who defaults first?

We’ve written that the stock market drama may be the lead story on the nightly news…but the looming shakeout in the credit markets is WAY more important. Our KEY belief for our personal net worth is…stay liquid and DON’T reach for yield.