September 1 Market Update

Interesting action in the last few days.

From a trading perspective, if you're not already on the light side on stocks and other assets, sell into strength.

We don't believe this is the start of anything catastrophic, but is simply an intermediate term correction--the one we've been calling for that has taken this long to materialize.

Certainly we have seen some changes in correlation. However, no real trend has developed. Thus, the "dollar vs. everything" approach to trading still works.

We're bearish in general over the next month or so. Bullish afterward until the end of the year. Bearish again early in 2010.

Let's take a look.

Dollar Update
Long term, the bearish dollar picture remains intact. At some point, we'll have to trade on fundamentals, and paper assets not tied directly to dollars will weaken. However, until that happens, we are tied inversely to the dollar. The dollar continues in its bearish right descending triangle with a target level of 70-ish. A break in the RSI above the red line or in the blue trend line on the chart will be a warning that we may be returning to a credit-crisis-like event. As of now, this is not an issue. The slow stochastic is oversold, so we can expect the dollar to trend up or sideways.
In the shorter term, the dollar continues to range trade within the same tolerances we discussed before. Indeed, we may now have this bearish wedge pattern (in blue) to give us a warning of an impending major move. A break up, especially out of the 79.25 area, is a warning that the mid and longer term picture (above) may be at risk.

Gold
The short term gold picture shows a weak breakout of a symmetrical triangle pattern to the upside. The pattern is weak because it ran the course of the entire triangle (just about). We need a confirmation of gold moving above the 955 level in order to confirm a break out. Why 955?

You can see that level corresponds to the intermediate term symmetrical triangle key support level below. In addition, you can see the inverse head and shoulders that will take gold to 1300 if the neckline is broken on the upside at about the 1050 level.

We believe that the USDX must go down for gold to really rally. Otherwise, gold will generally remain flat. The implication of this chart executing the inverse head and shoulders is that the USDX will fall through support in the upcoming few weeks.


Energy
Frankly, we were wrong about a false breakdown in natural gas. At this rate, natural gas producers are going to have to pay natural gas consumers to take the stuff. It looks very bearish for the next 6-8 weeks at least. We may see a sub-$2.00 cash price on nat gas. Sorry, P.M....


The chart for crude oil is much better. Same targets apply as before. We're buyers at anything sub $65 as long as we don't see a return of credit lock-up that forces deleveraging. Regardless of what happens with the stock market explicitly, crude looks like it will have, at worst, a few dollars more of correction before resuming an up trend.

Commodity Complex
Lots of fractal patterns on this chart. A likely pull back to 405 is in the cards. A break below that is a concern for commodities as a whole. We believe the downside is limited and will be buyers of grains, oil, select base metals, and energy after this correction and resumption of the up trend.

Copper
Copper continues to look like a strong performer for the long term. A drop back short term to 270 is in order with an intermediate term pull back to 260 or so is likely. As long we we do not break the lower part of the channel, we can expect longer term prices to move up.

China
China looks oversold. Frankly, we're surprised at the continued sell-off. Don't try to catch a falling knife, but look for reversal of trend at the 2570 level. China suffers fundamentally from a weak customer base (North America and Europe), not a debt problem. Recessions come from oversupply of inventory. Depressions come from oversupply of debt that crashes and forces the deleveraging of assets. In the former condition, inventories will be worked off over time. In the latter condition, structural changes must occur to eliminate the debt. Assuming China can replace its large export customers with increased internal consumption, it will recover as there is no structural issue with the economy.

Fundamental Indicators
First and foremost on the list is the action in junk bonds. The HYG ETF is a good proxy to determine the health of the junk bond market. The 80 level needs to hold. If that fails, it will be a sign that we may be re-entering the credit crisis. If that were to occur, dollars and gold, especially gold, are the safe havens. Additional indicators we consider include LIBOR, interest rate swap spreads, LIBOR-OIS spread, and the TED spread. All such indicators are in good health, indicating that there is no credit stress to be concerned with. Thus, we believe we are simply seeing a market correction. Many assets, notably stocks with poor fundamentals, may not resume an up trend. It is important to invest at the right time (using technical analysis) and in harmony with the fundamentals in order to preserve and grow your wealth.


That's all for now!