I've been feeling this same way for the past week or so. From Mike Hinman at Lind/Waldock:
U.S. Dollar Takes Centerstage, by Mike Hinman
In just about every market, there has been a unique theme presenting itself during the last few months: the U.S. dollar has taken the global center stage. If you want to survive these trying times, I think you have to keep your eye on the dollar. Why? You don’t want to get caught up in multiple trades that will ultimately have the same end result. This is the first big mistake I am seeing these days. Some traders believe they have positions that are independent of each other, when in reality, it’s like having multiple units of the same position. This correlation has been high as of late across the board. It doesn’t hold true every single day for every market, but it does tend to get back to the same end result over time.
The next big question is what to do. There are two schools of thought on this subject. The first one is to diversify across the board. You will have a better chance catching the one that outperforms, but you will also be caught in the one that underperforms. I understand the reasoning behind this, but I don’t recommend it. The right answer, as far as I’m concerned, is to identify the leader and load up on that one regardless of how many units you need. It’s not the easiest thing in the world to pick out the “perfect” market, and sometimes you pick wrong. But in the long run if there is a clear leader for the trade you want, it usually ends up most profitable (or less costly, you can’t win them all) if you go this route.
Ok, so now the big question is what is the U.S. dollar going to do? Let’s take a look at a daily chart of the ICE Dollar Index futures contract, which tracks the value of the dollar against a basket of six global currencies.
First things first – I see a bullish flag formation establishing higher lows and a flat top. The breakout should come on the flat side, and we should be getting close to that day. The swing trade should bring this market up to the mid 82’s, so that’s my first objective until the next pull back and buying opportunity. These numbers coincide with a few trend lines that I don’t necessarily follow or would recommend trading off of, but it’s a good thing to keep an eye on and be aware of.
One thing I do pay attention to is the sentiment index and how investors feel. When the dollar was on its lows just three weeks back, the Daily Sentiment Index for the dollar was showing 6 percent were bullish. So 94 percent of people were bearish the U.S. dollar in the short run. The individuals who make up this index are the same people who always seem to show up late to the party. That boat was heavily lopsided, and finally tipped.
Your average investor can’t understand how the U.S. dollar could go higher with our government printing money and issuing debt at an unheard of pace. There are two reasons for what is occurring. The first has to do with the amount of wealth and U.S. dollar-denominated debt that is being destroyed. At this stage of the game, there is more destruction than creation. It’s like pouring water into a well that never fills up.
The second part of the equation has to do with the financial health of the rest of the world and how investors would much rather flock to the U.S. dollar than anything else in a crisis. This is what I see in the short run. We are in the very early stages of major trend reversals if my overall analysis is correct. I can’t give you an exact definition on the “short run” just yet. It may be three months, six months, or even two years, I’m not sure yet.
Inflation Likely Ahead
In the long run, which I am guessing is two years or more, I see the exact opposite of what I just described. All that U.S. debt and printed dollars will make their way into circulation. I think the value of the dollar will collapse. Inflation will take charge and all commodity prices will head higher. It won’t happen now because too many people are anticipating it. It will most likely come when you least expect it.
Now that you have my view on the U.S. dollar in the short run, you can probably tell that I have turned bearish on commodities and currencies in general. The key is to pick the sick sister of the bunch. I personally think corn and the metals, specifically gold and silver, look the worst.
Treasuries
Let’s now look at Treasury bond futures. Investors are bearish bonds. The daily sentiment index for Treasury bonds was 8 percent bullish just last week. These individuals think the dollar is worthless, the world will look for a new reserve currency, interest rates will have to go up to attract investors and everyone, specifically China, will start selling their bonds. I don’t think this is going to happen. I just made the case for a strong dollar in the short run. The world will not look for a new reserve currency–not yet anyway. That will take years, and I have doubts it could even happen in my lifetime. And, China couldn’t sell that much U.S. debt without causing them grave financial stress. The bottom line – look for bonds to head higher with the dollar in the short run.
How to Survive as a Trader
Liquidity and volume have been drying up in general recently. This has caused all the markets to be more volatile without rhyme or reason on a daily or even hourly basis. This is not the environment I enjoy. The first and most important rule in choppy times is to reduce your size. This keeps you around tomorrow if you go on a cold streak. Most people over-trade and chase their losses in poor times. Double down when you are making money, not losing.
You must truly believe in the positions you are entering. I have found the right way to tackle good trades is to first decide what you want to do, and then get in. That usually means buying when it looks awful, and selling when it looks good. Don’t get this confused with picking tops or bottoms. I’m talking about getting in on counter-trend moves.
Last but not least, when you have profits, take the money and run. It disappears too quickly if you don’t. Pushing positions in this environment has not been turning out well. Don’t get caught in that trap. The time will come for trend following, it just isn’t here today.
