Sand Spring Advisors LLC
The DM Speaking from Its Grave
May 17, 2003
by, Barclay T. Leib
There is no such thing, of course, as the German mark anymore, but intutively we still like to look at its chart (which is still being calculated basis the fixed conversion rate to the Euro set in Dec. 1999) more than we do the Euro itself. This is because most Euro chart data is fudged pre-1999.
As some likely remember, our own earlier expectation had been that the 1.04-1.08 region on the Euro would have offered more substantive resistance than turned out to be the case. The March-May vault up to 1.16 has left us scratching our heads a bit, and looking back at this old DM chart for guidance.
One thing is quite clear at present: The European currencies on a straight sentiment basis, are very overbought. Market Vane's Bullish Consensus reading for the Euro as of Friday stood at the very lofty 86. If our count on the DM chart depicted above is correct, there is also some possibility that the Euro (DM) may be due to finish a wave 3 at this juncture. Could a 4th wave dollar rally soon emerge before yet further dollar declines longer term?
Some subscribers have asked how we can possibly even consider such a path for the dollar given our even stronger belief that the current equity rally is about to peter out and reverse. Under this line of questioning, most people believe that equity weakness and dollar weakness almost always go hand in hand.
Unfortunately, we cannot provide a clean macro roadmap in answer to this question. All we can say is that the market's anticipation that the Fed will cut rates yet again has actually sent the dollar lower and equities higher recently. The end result is that people perceive that the stock market has gone up a great deal since March 12th (hopefully in the Fed's mind to create a self-fulfilling rebound in consumer confidence), but in foreign exchange-adjusted terms, this is, of course, something of a false domestic illusion.
At present, we await something to emerge that will unwind this new weak dollar-strong equity "relationship." Perhaps it will be a financial accident of some sort in Europe. Perhaps the dollar bounces for some other reason -- including the potential of drought-induced commodity-push inflation that slows down the Fed's easing proclivities. Guessing at the causal factors here is currently difficult.
But for now, we would not be chasing Euro strength, at least in the short term, and we continue to anticipate an elusive but increasingly imminent equity top.
Non-subscribers are invited to access our April 27th article, "Ugliness Coming," together with other past articles, by signing up for a quarterly Sandspring.com subscription below.
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