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Stocks Continue to Linger Near Highs

James Hyerczyk from ForexHound.com at 12/19/09


The U.S. equity markets experienced high levels of volatility this week. At times it looked like the Bears were ready to crush them, only to be met by the “Never say die” Bulls.  The continuing strength in the Dollar keeps putting pressure on stocks as traders reverse the carry trade.  The pressure has not been enough to trigger the slew of stop loss orders that seem to be well-placed below the current trading zone. A bearish pattern will become clearer if these markets can form a secondary lower top.  The markets are likely to turn sharply lower once a key main bottom is taken out on the weekly chart.  At this time, there are no indications that this market is ready to turn down yet.  There are indications of a short-term top, but nothing that indicates a change in trend to down is imminent.


The primary driver for this week’s weak trade in the equity markets has been aversion to risky assets due to credit concerns in the Euro Zone.  Traders should monitor new develops to see if this crisis is spreading to our shores.


Treasury futures traded mixed this week before closing higher. The Fed announcement on Wednesday regarding its plan to begin removing stimulus measures put in a bottom as it became a “sell the rumor, buy the fact” situation.  Oversold conditions may trigger a short-covering rally next week, but the long-term charts still indicate lower markets to follow.


The U.S. Dollar finished at a 15-week high buoyed by debt concerns in Greece and the Fed’s release of more detailed plans to remove excess liquidity from the financial system.


The U.S. Dollar opened the week lower after Abu Dhabi ponied up $10 billion to shore up the debt of Dubai World.  This break was short-lived, however, because speculators bought on the break in anticipation of more hawkish comments from the Federal Reserve. The Dollar remained steady after the Federal Reserve released its monetary policy statement on Wednesday, but soared on Thursday following an S&P downgrade of Greece’s debt.  Friday, the Dollar traded mixed as traders alternated between demand for risk and risk aversion.


Earlier this week, the Fed offered commentary on the economy, saying that deterioration in the labor market was “abating”.  This statement was a reaction to the decline in the unemployment rate earlier in the month from 10.2% to 10.0%.  The Fed did reiterate, however, that it will keep its benchmark interest rate at a historically low level for “an extended period”.


Bernanke and his friends also said “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth and tight credit.”  This statement can be interpreted to mean the Fed still wants to see people getting jobs, consumers spending and banks lending money.


The March Euro finished the week sharply lower.  Economic reports were largely ignored this week as traders chose to focus on the developing debt concerns in Greece, Spain and Portugal.  These problems will not go away until addressed by the European Central Bank.  Some traders feel that the other shoe is about to fall if Moody’s rating services decides to downgrade any of these three countries.  No one is certain if there are other countries facing similar debt problems.  This crisis may spread to Ireland or Western European nations. The Fed announcement is old news.  Traders should pay close attention to the debt issues.  Look for the situation to fester for some time and maybe even turn explosive.  This could mean serious downside pressure for the Euro.


Despite efforts to hold the March British Pound steady, sellers finally took control to drive the Cable lower for the week.   Debt issues in Europe are raising concerns that U.K. banks may face exposure to bad debt.  In addition, the U.K. has debt ratings issues of its own to worry about.  The story that the U.K. debt rating may fall below AAA is still out there and helping to limit upside movement. Until the budget gets fixed, look to be a seller on rallies.


The weakness in the equity markets is triggered another round of carry trade reversals this week which is helped pressure the Japanese Yen. On Friday the Bank of Japan left its benchmark interest rate at 0.10%.  In addition, it hinted that its biggest concern remains deflation.  Overall there were no surprises in the policy statement.  Look for pressure on the Yen to continue if equity markets continue to weaken.  The unraveling of the carry trade could have significant consequences for the Yen. 


U.S. Dollar tried to break out to the upside against the Canadian Dollar, but a geopolitical event on Friday forced traders to think otherwise.  Improvements in the U.S. economy seem to be spilling over to the Canadian side of the border. This means the March Canadian Dollar will become more sensitive to news which affects their exports - gold and crude oil.  If the Iranian takeover of an Iraqi oil field develops into something, oil prices could shoot up, taking the Canadian dollar with it.


The March Swiss Franc was down big this week. Traders not only reacted to the possible hike in U.S. interest rates but also to the growing debt issues in Europe. Traders sold the Swiss Franc earlier in the week on concerns the sovereign debt issues in Europe would adversely affect the Swiss Banking system.  Higher gold prices could save the Swiss Franc from a hard fall.


February Gold finished the week marginally lower.  Gold traders seem to be ignoring the stronger Dollar while shifting their focus to the developing situation in the Middle East.  Gold traders appear to be hedging the possibility that the situation between Iran and Iraq will develop into something major over the week-end. After holding yesterday’s low and regaining a key 50% price at $1107.40, gold was able to mount a small rally to $1118.00. The chart indicates that there is room to the upside with $1139.50 a possible target.


A geopolitical event could help March Crude Oil rally next week.  It’s been reported that Iranian troops took over an Iraqi oilfield.  This news triggered a short-covering rally overnight but New York traders didn’t chase the market higher.  This situation should be monitored over the week-end because it will set the tone in oil markets next week.  If nothing develops then look for the stronger Dollar and bearish supply/demand conditions to continue to pressure crude oil.

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