Because the obvious move is down for the US dollar index, the fact that it is hanging onto the recent range of consolidation is positive.  That said, time is running out and you can expect a big move one way or another quite soon.   Given the recent reverse correlation to stocks (SP500 index) and metals, expect the latter to be hit hard if the dollar continues up from here and vice versa if the buck breaks again.

5-23-11 UPDATE: Not all metals are equally exposed.  Gold has been getting special treatment over the past few days.  Although this is not working for silver (SLV), gold (GLD; IAU) is being bought as dollars are bought, which means that gold is holding more or less steady after the initial pullback.  In fact, gold was up on Friday and is only down slightly today so far.  If gold continues to act this way, we may have the “European Panic Scenario” on our hands, which we experienced in 2010 as detailed in my PDF.  Please read my free PDF on Stocks, Gold and the US dollar.  It may save AND make you a lot of money going forward.

Free PDF Access and My latest SP500 Index numbers are here

If you want to see the PREVIOUS issue on the SP500 Index (the numbers are still current, although we’ve broken key support mentioned in the video): Previous Issue

Why is it so simple?  Because the entire game is being fueled by the Fed’s printing of US dollars.  They have committed to completing the repurchase of hundred’s of billions of Treasuries, a process that will end by June 30th they say.   Stay tuned to find out if the Fed has any other way to move the markets.  The Fed stated its goal to lift stock markets publicly.  It is NOT a secret. 

If the Fed does nothing, the liquidity that was in the system will suddenly be gone.  So what does that lead to?  Higher interest rates and an economy that slows due to those higher rates.  The fact that margin interest in stocks is at a very high level does not help either, as those buyers will be forced out of their trades as rates move too high for them to stomach.  Stocks will be sold, not because anyone really wants to but because they HAVE to.

Housing will be in more trouble with higher prevailing rates too.  This is one of the main reasons the Fed has been so persistent in keeping interest rates low.  So more people can service their debt rather than defaulting on it.  The source of this credit crisis was and is still housing.  The problem has been covered up, sort of like doctors may medicate a patient to hide symptoms temporarily, but when they stop the meds, the fever or headache comes roaring back.  That would be one more headache for this stock market.

The big risk to the US dollar index trade is that the Fed likely has some bullets left, some dollar killing bullets.   If they were to expend them now, they could bring the dollar back to the prior low.  What makes this unclear is the fact that the dollar has been beaten down so low.  They can afford to have the US dollar index rise a bit more and ease stocks back a bit more.   Which will they do?  Watch the market and you’re sure to find out!  As of the close in NY on Wednesday 5-18-2011, the dollar is still in play.  If the Euro can hold above the April 18th low (1.4156), the dollar may find itself in trouble again.

Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.

© 2011 David B. Durand, M.D. All rights reserved.