Wednesday, October 10, 2007

Waiting For The Worms

NEW YORK (AP) -- Wall Street stumbled through a lopsided session Wednesday, closing mixed as profit warnings and news from blue chip names Alcoa Inc. and Boeing Co. dragged down the Dow Jones industrial average but largely spared technology stocks.

The stock market's uneven but still relatively calm trading Wednesday followed a surge the day before that was sparked by release of the minutes from the Fed's last meeting. Wall Street initially was ebullient that the Fed didn't appear to rule out further rate cuts but, on reflection, some investors seemed to be questioning whether that response was a little too optimistic.

"People are looking backward at what the Fed was discussing to try and discern whether or not we're in a recession," said Kim Caughey, equity research analyst at Fort Pitt Capital Group. "Looking in the rearview mirror isn't going to give us that clarity because its history, so instead I'm really looking forward to what corporate earnings will show."

What's this, a black sheep among the flock? Where was this voice of reason yesterday as the boobs on Wall Street chased stocks higher with Monopoly Money? Can stocks, the Dollar and Gold all move higher simultaneously? They did in the Fall of 2005. Check your charts...

US Dollar: Are All Bets Off for an October Rate Cut?
Wednesday, 10 October 2007 21:57:04 GMT

We are continuing to see directionless movement in the US dollar which has strengthened against some currencies but fallen against others. Futures traders got it right yesterday when they drove rate cut expectations down sharply following the release of the FOMC minutes. Equity traders have finally followed suit by taking the Dow down 80 points today. It seems to be only a matter of time before currency traders take the dollar higher as well. The only reason why they are holding back is because they want to see Friday’s retail sales and non-farm payrolls report before deciding whether all bets are truly off for an October interest rate cut. Tomorrow’s report on import and export prices will be a leading indicator for whether producer prices last month were as firm as the market expects. In addition to PPI, the trade balance and jobless claims are also due for release. Inflationary pressures are expected to rise as the result of strong commodity prices and a weaker dollar. The latest comments from FOMC voter Rosengren indicate that the Fed supports a weaker dollar. Rosengren said that a weaker dollar is good for exports and for the time being, the pass through inflation from foreigners are not nearly as great as we might expect because a number of foreign importers frequently price to the US market rather than their own market. We continue to believe that the Federal Reserve does not need to lower interest rates at the end this month, especially if retail sales remain positive. The have already made a big move to stabilize the economy and so far, it seems to have worked. All we need now is to make sure consumer spending holds steady and data indicates that inflationary pressures are as strong as the Fed suggests. If that materializes, then the Fed has all the flexibility they need to leave interest rates unchanged and dollar bulls have the fundamental reasons to take the currency higher.

As I was saying, speculation yesterday that the Fed would cut rates again this month was BULLSHIT. That rate cut last month was aimed at one thing only...bailing out the Boobs on Wall Street. The spin was that it was done to rescue the floundering sub-prime borrower. LOL, the jokes on rates have been higher ever since.

CLEVELAND -- A year ago the U.S, mortgage industry wrote the highest number of mortgages of any month in history, 600,000.
Many of these adjustable rate mortgages offered "incentive rates" which are due for re-adjustment in October. Industry experts say many people who took out these incentive mortgages will face balloon increases in their payments of several hundred dollars a month.

Once the fallout from this "rate-reset bonanza" comes to light late this year or early next the Fed will get serious about rate cuts. And at that point, the US Dollar goes buh-bye. Don't be surprised if the Dollar, Stocks, AND Gold all rise higher through the Fall. As the first days on Winter arrive, the Dollar will go belly up, interest rates will fall, stocks will rise further, and Gold will explode to and through $1000.

But what about today? Noise... Gold and Silver are still "frothy" and both need to work that off before actually moving higher. "Seasonally", both are weak in October. I continue to believe that Gold and Silver will consolidate through the month of October. I do not believe that the low for the month has been hit yet. We won't know it has been until it is in the rear view mirror, but we must be prepared to take advantage of it when it appears in the present.

If we crunch the numbers...we get crunchy numbers. However, RSI and MACD can give us clues as to when we might "see" the October low appear. In Silver I will feel comfortable that we are near a low when its RSI is around 40, and confident that a low is in around 20. In the Fall of 2005, Silver rose with it's 50 day moving average as solid support, and bounced repeatedly off it when it's RSI was around 40. However, as you can see by the chart above, an RSI reading around 20 generally has coincided with a bottom in Silver. All lows in Silver are then confirmed when the MACD lines cross from bearish to bullish.

I think Silver will bottom in the second half of October between 12.70 and 12.90. I'm only guessing, and we really won't know until the "internal indicators" of RSI and MACD confirm the low is in, but it pays to be prepared. This low will most likely come and go quickly...and we all know, "The early bird catches the worm."

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