Lets start with the currency and work our way backward through a couple of charts to see if we can put this all to use.
The US Dollar continues to exhibit a pattern of “lower highs” coupled with the current fundamentals (the printing of 85 billion new dollars per month) suggesting to me – further downside is certainly in the cards. A lower dollar leads to higher prices in our commodities market right? – which in turn puts pressure on bond prices and interest rates.
The entire commodities complex clearly bottomed in June, and has taken a nasty pullback to an extremely solid level of support. As the USD rolls over – we can expect higher prices in commodities.
The symbol “TLT” tracks the price of the U.S 20 Year Bond. As the price for bonds falls the rate of interest paid rises (the price of a bond and its yield are inversely correlated).
Lastly in this wonderful chain of events we look at the SP 500 (or futures symbol /ES) and see that if indeed the intermarket analysis holds any water – a falling dollar creates rising commodity costs, in turn leading to inflationary pressures pushing interest rates higher and bond prices lower – eventually spilling over ( as businesses begin to feel the pinch of higher borrowing costs) and lastly effecting equities.
Now please keep in mind that these things don’t all happen “on the turn of a dime” – but all things considered it would appear that this is the scenario currently playing out in markets – as the dollar printing continues, commodity prices start to rise, bond prices turn lower (and interest rates higher) – and lastly we will see a reversal in equities.
I am still sticking with the timeline of late Feb to early March where I envision the stock market to start making its turn, as we can clearly see that the chain of events unfolding is leading us in that direction – likely sooner than later.
I don’t necessarily expect stocks to “crash” as we have to keep in mind that the FED will do anything in its power to keep prices elevated – but as the forces outlines above begin to take hold – “sideways to down” looks far more likely than any type of rocket to the moon.