I have been short-term "bearish," expecting a pullback in the markets because of some technical overbought conditions. Market sentiment was too inclined to the bull camp and breadth had deteriorated in the advances. Fewer stocks and indexes were making new highs together with the Dow blue chips, which can be interpreted as a gradual loss of risk appetite.
When the market reached new highs last week, I didn’t think it was going to break out and continue to advance due to those factors.
The dollar, the instrument which has fueled the rally in all type of asset classes thanks to a carry trade, is currently getting stronger and thus stopped the rise in the markets.
The greenback gained strength thanks to a much better than expected non-farm payrolls job report. It closed over its 50-day moving average for the first time since last April and, from a technical perspective, it suggests that we might get an intermediate-term bounce.
We have seen a clear correlation of a weak dollar/strong equities all year long. A stronger dollar has a negative effect towards stocks, commodities, and gold.
Despite all the bearish factors, the decline has been modest and bears need to breakdown of the rectangular pattern the market has been confined to during the last month. In order for the short sellers to make profits and breathe a little easier, they need take down the 1,080 level in the S&P 500.
Even if the pullback continues, however, I believe it will just be a pause in the rally and not the beginning of another bear market.
The bull run, in my opinion, has few economic fundamentals and it is mainly fueled by the massive worldwide money printing and "stimulus" intervention by governments.
Yet the fundamentals for the dollar are awful and will keep getting worse. A rise in the dollar due to a good non-farm payroll report means nothing in the long term.
First of all, from a technical perspective there a lot of important support levels that need to be taken down and long-term moving averages are sloping up, indicating that the primary trend is still bullish.
Most importantly, yesterday President Obama revealed that he is planning more stimulus packages for the economy due to the failure to create employment by the current policies.
Obama said he in intends to "spend our way out of this recession."
You can’t spend your way to prosperity and for me these policies are clearly misdirected.
More stimulus means more debt for the U.S economy, more Treasury bonds to be sold. All of this worsens the fundamentals of the U.S dollar.
Furthermore, I wouldn't be surprised if the money printing policies are exacerbated once again by Federal Reserve Chairman Ben Bernanke.
To support the new stimulus, we might see more Treasury debt buyback programs or other plans to deliver liquidity to the market and make the payment of the new debt "cheaper" by debasing the dollar.
This should stop a further drop in the markets and also make the dollar head lower once again. An intermediate top or a possible top could have been hit in the markets if the government does nothing or, in some time, the Fed raises rates.
Hearing Obama speak yesterday, I think that the latter has a very low probability to occur and stocks after a pullback could continue to rise despite the bad economic conditions and fundamentals.
I estimate that the main targets that will be favored due to the renewed stimulus and money printing will continue to be hard assets such as gold, emerging markets, and U.S companies that have business overseas and receive most of their revenue in other currencies.
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