A Change In What’s Working

Since March, we’ve seen a sell off in the dollar which translated into a rally in commodities, materials, & emerging markets.  After today’s better than expected jobs report, the dollar initially sold off but then reversed very quickly and rallied strongly on the day (more on that in a minute).  As we’ve been reporting here for several weeks, the economy will continue to surprise people how good it is.  Today was no exception.  247,000 jobs were lost last month as opposed to the estimates of 325,000.  Job losses peaked at around 750,000 jobs lost in one month.  Once again, people are still losing their jobs, but it’s improving.  I wouldn’t be surprised if this number actually goes positive over the next few months.  I don’t think that is fully discounted in the stock market.  The unemployment rate dropped for the first time in several months to 9.4% from 9.5% last month.  I had a caller this morning ask how can the unemployment rate drop when people are still losing their jobs.  Here’s the bottom line.  People are walking away and not looking for work right now.  Those people aren’t in this number.  If you look at “total unemployment”, it’s in the mid teens.  That would include people part-timers, people who have temporarily stopped looking, etc.

As far as the stock market, here’s what I’m seeing right now.  I’ve been mentioning on my twitter feed that there is a rotation going on.  There is money going out of tech and into financials & real estate (REITs).  It may be bigger than that though.  Take a look at the picture below.  It’s a picture of the dollar index going back one year.

Dollar Index


You’ll notice on Monday we broke through some technical levels on the dollar index.  This sent commodities, materials, & emerging markets up strongly.  The dollar has been inversely correlated to the stock market but not today.  You can see from above (red circle) that the dollar went back above the technical breakdown level of around 78.50. 

What if the dollar continues to strengthen?  Then, you have to re-balance your portfolio to a certain degree.  Instead of focusing on international equities & materials, you have to look at U.S. small caps, U.S. real estate, & U.S. financials.  Many are not only underinvested in the market but they are way underinvested in these three areas.  The place to be in this rally has been anything benefiting from a weak dollar.  I think in the long-term, that will be the trade.  But, it’s not a straight line and your portfolio better comprise of some investments that benefit from a stronger dollar (at least in the short-term).

Money is not coming out of the market so perhaps the selloffs everyone is looking for is simply a rotation.  We’ve seen it this week.

This post published at www.karleggerss.com

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2 Responses to “A Change In What’s Working”

  1. 1 Jamie August 8, 2009 at 7:33 am

    Karl, Given that we may see a rise in the dollar short term (I do think long term the dollar will go lower), I put on my short oil position (I’m long UNG as well) using DTO on Friday. I believe even if the economy does improve, if the dollar stregthens, I see oil going lower. Any thoughts?

    • 2 keggerss August 9, 2009 at 6:32 am

      I think I’d wait until it went above its 50-day mov avg. to make sure but it is looking like it’s getting close to put that short back on. I’d probably just keep a stop underneath given that dollar could reverse anytime and economy is still improving but the thought process of your trade is spot on.

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