Tuesday, March 20, 2007

The Second Mouse Gets The Cheese

The Monday after the quadruple witching is often one of light volume. So much activity has gone on the past few weeks, that it is a time to take a breather and start anew in looking forward for another quarter. Since the third Friday of March is past, all options are now being traded for the month of April and the futures on indexes are now trading the June contract. Everyone has rolled over. This can lead to a lot of over analysis, but one thing it means is the roll over trade and hedging associated with that are done for a while.

Yesterday's volume was light, but that can be expected the Monday before a Federal Reserve announcement on interest rates. Today before the market opens we will have some economic reports from the housing sector. Combine these two events, and the light volume on Monday, and the 115point up day in to Dow Jones isn't something to hang your hat on. With the down moves we have had in the past two weeks, the focus on risk is something that more and more traders/managers are thinking about. Over the past couple decades the market usually has a 10% correction about once ever 18months on average. It has been too long since we have had one, we are due. Having a correction does not mean the end of the world. It can be painful if you ignore the signs and pretend that everything always goes up and there isn't anything to fear. One thing to watch for is the volume on up days versus down days. If we have down days that are on heavy volume and the rally days are on light volume, don't get carried away trying to be bullish. It is best to wait for some really heavy volume on an up day of close to 2%. The with some follow through after that day, you can have something to buy positions off of and use as a stop or support area. Right now the risk reward is not in favor of being bullish. You do not have to be the first mouse to buy!! Don't pick bottoms, didn't your mom tell you that?

With all of the foreign investment in the United States, and the fact that many commodities trade in US Dollars, it is helpful from time to time to look at what the dollar is doing against other currencies. Below is a chart of the US Dollar Index. It compares the Dollar against a basket of foreign currencies. If you are a foreign holder of our debt(bonds) or stocks, you probably watch this data more so than someone in the states. It is something we should all watch. If stocks are not performing well and the dollar is going down, well foreign investors are then losing on two trades; the stocks they own and the dollars they own it with. As an example let us say XYZ is $100, and the stock market goes down 5% and the currency goes down 5%. It is a double loss, and is felt more by foreign holders of our stocks than by domestic investors. One other thing to watch is as the dollar goes down in value, it should cause all those commodities, oil especially, to go up in value. This is just based on the currency fluctuation, regardless of supply and demand. All these little things can add up. The day when China's stock market was down 9%, our market followed and was down. Our bond market however, which China is a major holders of our bonds, rallied as there was a flight to safety. So everyone is looking at the China market being down so much, but China's holdings in our bonds had a great day. I look to seeing this situation happen a few more times. It hurts our stocks some, but bonds going up keeps our interest rates down. With our rates down, the world hopes we will consume and consume, and they can sell us all the boat loads of rubber dog poo and other happy meal toys they produce.

With uncertainty in the market, it seems to make sense to focus on commodity based stocks. This is a large group, and the next few posts will deal with Oil and Metals.

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