The Market Vs. the Dollar

11/16/2009 8:55 am EST

Focus: MARKETS

Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright, managing editor of Investment Quality Trends, says the rally is looking a bit tired, but economic fundamentals haven’t been driving the market anyway.

The primary trend remains down, and the secondary trend—the countertrend rally that began in March—is beginning to struggle.

For the market bulls, this merely represents a pause to digest the gains and gather momentum for a further assault to the up side. For the market bears, the recent backslide represents the end of the rally and the start of another leg down.

The party that ends up being on the right side of the question remains to be seen. Although the fundamentals are not supportive of further upside movement, the market hasn’t been concerned about the fundamentals for a while now; so what comes next is really any one’s guess.

Earnings season has been relatively well received, [but] the number of firms reporting top-line growth has been relatively few and far between. The fact that the bottom-line numbers have been met for the most part should come as no surprise, as expectations were never high to begin with.

For this quarter anyway, the market seems willing to give most of the Standard & Poor’s 500 companies a pass. At some point, however, this period of charity will go by the wayside and the market will demand earnings improvement—or else.

Where this expected improvement in earnings will come from, given that the short-term largesse from the government has come to an end, also remains to be seen. Try as I might I don’t see it.

The boost to stocks from a falling dollar has, for the time being, seemingly hit a wall. Too many folks were betting on continued dollar weakness, so in the markets’ perverse nature it had to switch course and take the dollar higher.

This is, of course, a technical thing and has nothing to do with fundamentals. When enough traders have moved to the other side of the dollar boat and there is some equilibrium, expect the dollar to revert to the down side once more.

On one hand, a weak dollar helps the economy by increasing foreign demand for US goods. On the other hand, a declining dollar scares the pants off our creditors who are watching the value of their dollar-denominated assets go down the tubes.

That the dollar is declining in value is no accident; it is totally by design. The US government is spending hard to fathom sums of money to rescue the financial sector and stimulate the economy, while the Federal Reserve is using government money to buy government debt. One need not be an economist to know how this ends; just watch any horror movie.

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