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THREE THINGS I THINK I THINK

  • These are the kind of trading days that drive small investors absolutely mad.  For 6 months the market has been rallying on what appeared like terrible economic news, but strong “liquidity” trends.  Then this morning we get a truly green shoot, the market spikes 2% higher and then folds like a lawn chair and gives back all the gains.   Oh the twisted way of the markets.  Of course, this morning, we wrote that this was not necessarily all good news for the equity markets. In fact, the dollar rally represents the near-term potential for Fed rate hikes.  Dollar up, commodities down, stocks down, rinse, wash repeat.  A number of analysts and websites are referring to today’s action as a correlation breakdown, but I don’t see it that way at all.  Nothing has changed in the long-term structural weakness of USA Inc’s balance sheet.  The inverse dollar/equity correlation is alive and well as this afternoon’s trading shows.  The dollar may rally in the near-term as traders fear potential rate hikes, but the real takeaway from today’s report is that this could be reason to sap the market of its main driving force: liquidity.
  • We bounced off S&P 1,120 like it was made of rubber.  Does this 50% retracement level from the highs serve as a serious near-term top?
  • A few days ago I referred to gold as “the riskiest of risky assets”.  It has come to represent everything that is weak about the underlying fundamentals in the reflation trade.  Today’s better than expected jobs report and potential for sooner rate hikes is positively damaging news for gold.   I still maintain that it is incredibly risky at these levels.  The yellow metal is down 4.5% on the day.
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