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Thursday, November 5, 2009

Market Thought... evaluating

The other day I indicated a new equation maybe in the works regarding the market. Currently, I feel there is a liquidity driven rally thanks to low rates and the dollar decline. The other day anomalies took place (highlighted in the 'new equation?' post) that puts to question the liquidity equation. However, there was no fundamental change to suggest the liquidity equation is altering.

A few things can change the equation, create an inflection point and force Fed action...

1. real economic growth by the US economy (that would spark higher market rates, higher dollar and higher equity markets)

2. stagflation (that would spark higher market rates, weak dollar and sideways-to-poor equity markets)

The other day, #2 was playing out, however one day does not make a trend. As such, we are at a point where data points need to be observed and evaluated. But observing the scenario, one can understand why I am a fan of TBT.

For the record, observing the current economic data I believe #1 is in our future, but ultimately I trade on the what the indicators are telling me. Hence the need for the evaluation.

HEADS UP: Today UUP went up pretty nicely, despite the fact that the dollar index ($DXY) was flat. Obviously that caused me to question the move. Suffice it to say, the move is artificial. Share of the ETF can not be issued, as they have run out, this will cause the UUP to move at a premium to the index. Because of this I will sell it tomorrow. Once they issue more, the premium will be lost and the value will decline. DO NOT BUY THE UUP until the bank can issue more shares, so it can track the index appropriately.

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