"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, March 1, 2013

Strong Weekly Close for the US Dollar

The USDX has been unable to clear the 81.50 level for some time now, though it did close right on it last week. This week however was a different story as the Dollar powered through this resistance breaking out of a 5 month long sideways pattern. It should be able to make a run to at least 83. If it can push past there it stands a good chance of heading to 84. That should be a big test of the currency. If it clears that, it will begin a trending move to the upside.

Hard to believe isn't it considering the fact that next to Japan, the Fed has been the biggest debaucher of the currency in terms of the sheer size of money creation it has embarked upon. It just goes to show how rotten the Yen, the British Pound have become and possibly the Euro might be. In other words, the US Dollar is the lesser of the evils.

Let's see, the US is running a $16 Trillion+ deficit with its leaders unable to agree on slowing the rate of spending (note that i did not say CUT SPENDING) by less than TWO CENTS on the Dollar and yet the Dollar is the currency of choice. Absolutely amazing is it not?

Note the ADX below (the dark line) is turning up from a very low level indicating the possibility of the beginning of a trending move. This line will need to to climb above 20 to indicate that this is anything more than a grinding move higher. Momentum however is positive.

A Tale of Two Cities

No, it is not the classic by Charles Dickens set against the backdrop of the French Revolution; rather, it is the price charts detailing the nature of the economy as told by two camps.

The first is the S&P 500 as it powers higher and shrugs off Italian election results, sequestration fears and moribond employment choosing instead to focus on the data detailing growth, albeit however minute that might be.

The second is the copper market, afffectionately referred to as "Dr. Copper" for its uncanny ability to project investor sentiment towards overall economic growth.

These two apparent lookalikes, Darnay and Carton, have recently taken to going their own separate ways unlike that of the novel wherein they find their paths increasingly intertwined.

Take a close look at the following two different colored lines. The blue line is the closing price of the S&P 500 (emini) while the red one is the red metal, Dr. Copper.

Don't worry about the actual price level of either one; look only at the DIRECTION of price movement for both lines. I have only gone back to June of last year with this for analysis purposes but wish to point out how the two lines are basically in sync until February of this year. Notice that they tend to both rise and fall together. Spikes in the S&P were matched by spikes in Copper with dips in the S&P coinciding with dips in the price of Copper.

Along about the beginning of this year, the two markets began to diverge a bit in the sense that while the general trend in copper was up, it began moving lower during periods in which the S&P continued to move higher. Copper would recover from the dip and move higher again, seemingly catching up with the S&P but right around the beginning of the second week of February, these two companions apparently parted company and did so rather glaringly.

Can you see how sharp the fall in copper has been over the last month? Can you also see that while the S&P has briefly dipped following copper lower since the middle of February, it then rebounded higher as copper continued to sink? The divergence is especially pronounced over the last week or so.

Here is the issue - both of these markets should not be both true.  In other words, if Copper is a predictor, and a generally reliable one, of expected economic activity in the future, then one has to question why the equity markets are seemingly no longer paying attention to its fall. We are constantly being told by the pundits that the global economy is recovering and growth is expected to continue, even if it is at a rather lackluster rate. Yet, here we have copper falling lower giving us a clear signal that growth is expected to slacken.

Which one of these forward looking indicators is true?

I should also note here that the large macro funds ( the hedge funds ) are now playing copper from the short side. Talk about more fuel for further uncertainty. Watching to see how this will further unfold is certainly going to be interesting to say the least.