06/24/11 The Market and thoughts on some economic trends

Today the market continues to be in a short term range. I am still looking for some confirmed strength before taking a chance on this market, and if I do it will be with smaller than usual position size. In this kind of market I am most comfortable in a majority cash position. I think it is important to be patient and keep my capital and confidence intact for a market that I would have a greater probability of success trading.

In my view the markets are now influenced more by Washington then normal. After the crisis of 2008 the stock market bottomed in March of 2009 and then we have been in a strong uptrend for the most part.

In my view this was mostly due to the Quantitative easing 1 and 2 done by the Fed. The stock market went up from the March 2009 bottom, but the US dollar weakened, and commodity prices powered higher. It was an inflationary boom, not any real growth. I could be wrong, but I do not think that recession that started in 07 ever really ended. Now the Feds QE program is scheduled to come to an end at the end of June. It is possible that the stop (or at least a temporary stop) to all this money creation by the Federal Reserve could create a deflationary environment for some time. We could see the dollar strengthen. I do not think the larger trend for the dollar is bullish (figure 1), but on the shorter term daily chart (figure 2) I see a series of higher lows (beginning of May and June, and mid-June). Looks like the dollar is showing some signs of stability.

The charts below are of the UUP, which is an ETF that tracks the dollar against several other currencies that include the Swiss franc, Euro, Japanese yen etc...

Figure 1


Figure 2