Monday, October 19, 2009

US Dollar -- Time to say bye?

Much of the rise in the stock market has been attributed to the fall of the US dollar. But will the fall of the USD be sustained? Let's look at it from both the technical and fundamental point of view.

For the technical portion, I shall take a leaf from Elliott Wave International's technical viewpoint on the elliott wave count


Notice the drop since March 09? This is in line with the multi bear rally from Mar 09 in stock indices. An inverse relationship is obvious between equities and the dollar.

The fifth wave appears to be ending, and USD might rebound soon. At the same time, stock indices (STI on my count, S&P500 on daneric's count) looks to be toppish soon. Everything is seemingly starting to fall into place. It appears that we are waiting for the stars to be perfectly aligned before something major happens.

Next, on the fundamental viewpoint, which I'm not very well versed in for forex.

Firstly, many are thinking that USD will get more worthless, and because of that, stocks will get even higher. Will that be true as time goes on from here? I favour the contrarian approach in this place.

Next, government actions tend to overshoot their original intention. Right now, I believe the amount of excess money have overshot their original target... because of the multiplier effect, because of this because of that etc etc...

The excess money flooding the market have to be pulled back one day. What will happen? It's likely that government intention might overshoot again. And this time round, it might cause a deflation in the USD.

Inflation causes equities to rise, deflation?

Also, for the economy, unemployment rates and wages are not improving while equities rise non-stop. A divergence between stock indices and actual economic health. What will this result to? Only time will tell.

In summary, it's definitely not a time to be gung-ho or greedy now.
Most stocks are not suitable for longer term investments of many years. The best we can do now is to do short and nimble trades, and prepare to exit with profits when there are some.

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