Saturday, October 11, 2014

Big D, Double O, Small M. That Spells 'Doom', Baby!

I've been away. I've been busy. The markets look toppy. Case in point ...

It is likely, though not required, that the small-cap Russell 2000 (tracked by IWM) will make an attempt to test its broken support as overhead resistance. If you are in a mind to go short, that might be a good time. In the bearish case, look for a test of 97, and probably 90. Anything under 83 is brown-trousers time.

Updated chart

I've drawn the Fibs from the 2011 pullback, the most recent big pullback. 2009 was deeper, of course. The question is, do you think we're in 2008-2009-type trouble, or 2011-type trouble? 2011 was mostly political. Europe was in a real pickle. Europe is in political trouble again today. The Germans refuse to do stimulus spending when it's obvious that it is required. I see other similarities between 2011 and now.

Just remember that every political crisis ends.

But for now, the euro is under pressure (as is the yen, as is the rouble) and the US dollar reigns supreme. This is happening despite widespread and ongoing "analysis" that the U.S. dollar is already sliding toward an abyss. This analysis is taking place in a background where the U.S. dollar is up 7% so far this year. And people are lapping it up.

Why is the U.S. dollar so strong? As I've said many times this year, the U.S. dollar is winning a beauty contest in a leper colony. 

  • It's not that our currency is so great, but the others look like hell.
  • It helps that the U.S. deficit (not the national debt) is falling like a proverbial rock.
  • Our economy is outperforming other economies.

So of course the US dollar is going up.

Source: New York F*cking Times

What does this kind of rally in the US dollar mean? Anything priced in dollars gets crushed. If you are a bit forward thinking, just remember that nothing goes up in a straight line. There will be a correction in the dollar. When that happens, a lot of things that have been under pressure are going to go ZOOM!

By the way, I have my own reasons for thinking the U.S. dollar is heading for a haircut in the longer term, and it has little to do with the reasons being pushed by the crackpot chorus. It has a lot to do with China, Russia and Saudi Arabia. More on that another time.

Next question: Would I play energy for a bounce here? My Gold & Resource Trader subscribers are long ProShares UltraShort Oil & Gas (DUG) ... again ... and it's a nice cushion considering what happened to some other positions. A while back, I gave my own target of $85 as a Come-to-Jesus moment for the oil industry, especially the Saudis (maybe a Come-to-Allah moment, then). And this past week, West Texas Intermediate, the U.S. oil benchmark, hit $85 and bounced (international oil prices remain higher, but way off their own highs).

So is that it for the oil pullback? Is this parade of pain finally over?

To put a floor under oil prices, two things need to happen. The US dollar needs to stop going up, though that is secondary. The main thing is that oil production needs to stop going up. Those sad sacks who write to me with frothy, fear-dripping tales about ISIS and the Iraqi oil fields -- zip it. No one cares about your theories about what ISIS will do, Field Marshall Monty. I'm sure you have a mainline to ISIS strategy HQ, right? Yeah, right.

In the real world, don't expect US oil companies to shut in any production until $70 or so. So that leaves Saudi Arabia. The central bank of oil. You might think the conservative Saudis would cut production to boost prices. That would be a costly assumption, at least so far. The House of Saud recently cut prices to match Brent Crude to preserve market share. What will the Saudis do now?

I thought pipelines would be a refuge in the oil pullback, because they make their money on oil flow (which is still going up), not prices. Clearly, I was wrong. When traders got scared, they dumped everything. I do think pipelines are a great buy on the pullback, because North American production is likely to keep rising if the price of oil stabilizes above $80.

By the way, lower oil prices are generally bullish for the non-oil economy.

But we shall see.

Other Reading

4 Forces That Are Driving Down Oil Prices -- and Could Drive It Lower (That's my original headline; the headline the editor put on this is WTF, but whatchagonnado). 

Russia is "Spear Phishing" -- and You're the Fish

Grumpy Gold Men

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