Dollar's drop unleashes stocks, gold

A long-overdue pullback in the greenback prompts a powerful short-covering rebound rally and presents a great opportunity for investors to profit from metals.

By Anthony Mirhaydari Jun 6, 2012 1:51PM

The foreign exchange market, one of the most volatile and unpredictable areas of speculation, continues to drive the fortunes of stocks, commodities and pretty much everything else. With the dollar dropping hard and the euro rising Wednesday on reports that Europe is prepping a way to push capital into Spain's beleaguered banks, risky assets, especially dollar-sensitive precious metals, are blasting higher.

 

Such are the consequences of a pullback by retail investors and a rising domination of hedge fund types and high-frequency computer trading algorithms. No matter -- we can use it to our advantage.

 

 

First, the details. This morning's policy announcement from the European Central Bank was a dud, with no new actions hinted as the institution remains worried about lingering inflationary pressures.  But this was eclipsed by multiple reports that Europe is frantically cobbling together a possible solution to the Spanish banking problem. According to RBS estimates, with borrowing costs rising fast, Spain needs nearly $600 billion in assistance just to get it through 2014 as it battles with the legacy of an epic housing bust and bad mortgages.

 

But Spanish leaders, mindful of their too-big-to-fail status within the eurozone, are pushing back against Germany's insistence that they follow Portugal, Ireland and Spain into the arms of an international bailout administered by the International Monetary Fund, the ECB and the European Union. Instead, Spain wants the E.U. bailout funds to bolster its banks without requesting a formal bailout.

 

The stalemate seems to be breaking in Madrid's favor.

 

According to reports, German official believe the bailout funds would be used for direct bank assistance in exchange for a say on executive strategy and management. The kicker is that if it all goes sideways, the home state would be on the hook for any losses. The good news is the assistance would not be added to Spain's sovereign debt levels and could help break the cycle of weak banks, higher government debt, higher sovereign borrowing costs, and even worse banks as their government bonds lose value.

 

 

With Europe finally taking constructive steps after a lot of foot dragging, traders are rushing to close extended short-euro/long-dollar trades. And that's benefiting a whole range of assets with gold, silver and the related mining stocks leading the way, as I've been expecting since I warned about the dollar last week. The Edge Letter Sample Portfolio was well positioned for this, with Great Basin Gold (GBG) up more than 21% and the Velocity Shares 3x Silver ETF (USLV) up more than 15%.

 

New areas of strength include emerging-market stocks and semiconductors. I'm adding new positions in these areas to the portfolio.

 

The short-euro/long-dollar trade got very extended, so look for this dynamic to continue for at least the next week and a half heading into the next round of Greek elections on June 17. Then we have a G-20 meeting in Mexico on June 18-19. And, finally, a big eurozone summit on June 28-29.

 

I plan on booking profits and moving largely to cash ahead of those events.

 

 

Technically, the S&P 500 has popped back over its 200-day moving average. Normally, a retaking of this oft-cited line of demarcation between bull and bear phases would be considered a sign of strength. But history suggests otherwise.

 

According to the folks at Sundial Capital Research, since 1928 there have been 19 times when the S&P 500 was above its 200-day for several months, dropped below, then popped up again. Only four of those events went longer than a month before shares dropped back below the 200-day.

 

On average, it took the index only five days and an additional 0.7% rally before it gave it up and fell away again.


Trading update

Two new, leveraged ETF positions are being added to the Edge Letter Sample Portfolio: The Direxion 3x Emerging Market Bull (EDC) and the Direxion 3x Semiconductor Bull (SOXL). Less aggressive options include the unleveraged iShares Emerging Markets (EEM) and the Market Vectors Semiconductors (SMH).

 

I am also covering my two regional bank shorts.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

51Comments
Jun 6, 2012 3:23PM
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Let's face it, the market has degenerated into a computer driven cesspool of manipulation with the Fed supplying the juice in the absence of any real economic forces to move the market up the old fashioned way - earnings.
Jun 6, 2012 3:33PM
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Come on! The 'header' is entire crappola.  The 'dollar' is being bartered right now.  "They" are trying to make it appear as if the 'dollar' has weakend and hence this 'contrived' rally. When factually the dollar has gained because of unfathomable weakness in the 'worldly' sector given their 'paper' is entirely worthless.  It is a con.  Europe and the US will 'roll' out the printing presses and this will continue.  Any valuation you think you have or had in 401k's and pensions will be adios and see you. You have not seen inflation, yet.   

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 nobody can predict the stock market. there is so much minipulation coming from so many places that the market is moved on FEAR NOT VALUE.

 

 i don't think OBAMA is good for the stock market and ROMNEY is probably better at controlling the fear. i belive that both the dems. and repubs. are both deep into the pockets of special intrests groups which make them both puppets.

 

 i believe OBAMA gave unions quite a bit of bread in his first year with the auto bail out and now he feels they have become baggage with his stand away approach in the wisconsin recall election. that is why Bill Clinton stumped in that election instead of OBAMA.

 

  i believe OBAMA has reason to worry about wisconsin a big union and dem state relecting a repub governor. the middle class spoke loud and clear against the union and dems and that echoed across the country. ROMNEY could gain big from the voice of wisconsin wanting a more balanced budget and a leash on unions.

 

  

Jun 6, 2012 4:03PM
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Too late for us ALL regardless of what party is elected.

 

The world governments are all making behind-closed-doors-deals that shut us out.

 

They are just buying time to let us down as easy as possible....nothing hard or violent....a slow crash and burn is more palatable.

Jun 6, 2012 5:20PM
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Let me repeat my best advice i gave you all one month ago. GO BUY AMMUNITION, your going to need it soon enough. Now don't be confused with those, "the sky is falling" folks who are insisting you should buy gold, silver or some metals stock. Yes, it's very clear that the world has fixed it's problems when the market moves all most 300 points in one day on the sure bet that the IMF "might" cut it's rate to Spain and others. This has nothing to do with the USA! We Americans do not depend on the rest of the planet for our economy, we never have in the past nor will we now. To fix our problems here at home, there is a simple solution. STOP buying crap made in china from Wall Mart to begin with. For those of you in the dark, our government has allowed China to buy property in California  to set up shop in the scrap metals sector. They are shipping scrap from California to China so that it cost less for them to make products to sell back to us. Get the picture yet? How do i know this? because I'm in the recycling business and know the daily scrap prices, and as of today it was between $120-$150 a ton. So why are all metal prices going through the roof while scrap is dropping? To keep China off our (national debt) backs.
Jun 6, 2012 2:57PM
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KIRK...  Better Romney than stupid "57 States"....  You can't fix stupid...  Obama and his "Polish Death Camps" and "Marine Corpsmen are the best combat undertakers in the world" speeches shows just how stupid he really is...

But his economic polices really are what proves him to be an complete dope.

Get rid of the party of Tax, Borrow, SPEND and debase out way to prosperity...  No more Donkeys!
Jun 6, 2012 6:44PM
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How unfair is it to impose austerity on the other countries like Greece, and humiliate and vilify them on the world stage,and then just meekly hand over billions of dollars to Spain without them having to even ask for a bail out. I can't wait for this totally corrupt, bankrupt, world financial system to collapse. All of the jawboning by world leaders, and their meeting after meeting after meeting -can't change the fundamentals. Humpty dumpty sat on a wall. Humpty Dumpty had a great fall. All the kings's horses and all the king's men couldn't put Humpty together again. Humpty in this case being the global financial system.

I mean really- after  3 years of this crisis world leaders meet and decide that they must do something about the crisis- and the stock market rallies. WTF- are you kidding me. Three years into this and that is the best they can do. It would be hilarious if it wasn't so tragic and pathetic.  
If I was Greece, Portugal and Ireland the moment they hand money over to Spain without austerity and an IMF bailout I would instantly default. Why should only certain countries be allowed to suffer while others get special treatment. We need to stop with this too big to fail nonsense for businesses, and Countries too. If you are big enough to spend money you don't have you are big enough to go bankrupt and take your medicine. True pride is manning up and taking your lumps. Spain is being a coward. They helped force austerity on the other countries. If it was such a good idea how come they don't want any for themselves. As I said before cowards
Jun 6, 2012 3:26PM
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Hey SRT driver . . . how is life in your cocoon ?  Ever heard of global events driving our stock market at least as much as anything that WE do ?  Your cutesy lingo-spell writing style and small " o " on Obama and your self-assuredness are precious.

 

Hey Mirageguy . . you really think that President Obama is stupid ?  Seriously ?  Your posts over the recent weeks and months demand to be ignored at the risk of falling into a coma or else just total amazement at what stupid really looks like. He may have liberal ideas that you and 50 % of us do not like . . . but when you say that he is stupid . . you lose ALL of your credibility.  Like whan Romney gives hin a grade of " F " on foreign policy and US security . . . then you know that you can dismiss all of Romney's so-called wisdom as pure baloney.

 

A respected adversary speaks with intelligence as he disagrees with you, and makes valid points based on some reasonable interpretation of fact, and tries to persuade you to his / her position. You guys are pathetic.

Jun 6, 2012 6:19PM
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Boehner's pushing to extend the #1 cause of our debt, the Bush tax cuts. The cuts are doing almost nothing to strengthen our economy, they only help the millionaires who benefit about $123,000 per year from the cuts, while the middle class who earn $40,000 to $50,000 per year, only save about $645 dollars per year, not a big impact, while we continue to defer our debts to our children. Evil takes many forms, taxing our children so the rich can get richer is one.
Jun 6, 2012 2:23PM
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the stocks jumped cuz of the "real" truth, that in Nov obama is done, finished, over and completed, Walker wins and the next day stocks are up? if u think that's a co-inky-dink ur a delusional lib hehe oh I soooooooooooooo look 4ward to Nov!!

Jun 6, 2012 6:46PM
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Pull quote I see from this article.

"Such are the consequences of a pullback by retail investors and a rising domination of hedge fund types and high-frequency computer trading algorithms."

Which is why we need a big fat $1.00 transaction tax per $100 trade.  Make the speculators pay for speculating.

Jun 6, 2012 6:36PM
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OK, take a moment and just for a minutes suppose that everything you have been believing over the past few years is, in fact, a contrived lie.

 

Yes, you are being lied to.  You think its liberals vs conservatives wrestling for a better power position, but it is not. Nothing that any president has done has caused nor prevented the current depression. 

 

Its computer speculation, and nothing more.

 

Consider there is a company with a million dollar building and its a public company.  Traders drive the stock price down lower than the value of the real assets, if you own stock you lode money.  But that company, and its property, are not really worth any less, its all a matter of belief systems.  If everybody agrees that the company is worth a half million, you lose half your investment.  Yet, that company still owns a million-dollar building (or other assets worth the million).

 

So where does the missing money go?  Its the insidious tax of speculation.  Day traders buy and sell stocks and churn the price up, then they sell and take a profit.  Where does that profit come from?  From the presumed valuation of the stock.

 

Money goes from your pension savings to a speculalting day-traders' pocket.

Jun 6, 2012 4:30PM
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I love it    The lib dems are getting their butts kicked every election    Nov. We win the Pres. and the Senate
Jun 6, 2012 4:52PM
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This one is so good, worth repeating:

"Headline should read:  "Stocks Jump on Gov. Walker Re-election!"

Now, let's repeat it in November after the Supreme Court will have shoved down the Pelosi/Reid/Obama throat the MONSTRUOUS Unhealth Care and then we will read:

"Stocks Jump, Obama is gone".

Then we can get rid of the CHINA debt once and for all.

I guess the Unions thugs are off today, it shows in this blog... you know they haven't had a day off since yesterday...

Jun 6, 2012 4:27PM
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I blame this all on the Bossa Nova.  It's the dance of love!

 

 

Jun 6, 2012 6:18PM
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I see so much discussion about politics, not business here.

How many of you folks actually make your investment decisions based upon what political news you read in the paper today? To those who answer "Yes"..... I have a bridge to sell you...

Business and politics don't mix....



Jun 6, 2012 4:32PM
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Headline should read:  "Stocks Jump on Gov. Walker Re-election!"

Jun 6, 2012 7:53PM
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geez i hate democrats and union thugs
Jun 6, 2012 4:07PM
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 Howard Beale: I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth, banks are going bust, shopkeepers keep a gun under the counter. Punks are running wild in the street and there's nobody anywhere who seems to know what to do, and there's no end to it. We know the air is unfit to breathe and our food is unfit to eat, and we sit watching our TV's while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be. We know things are bad - worse than bad. They're crazy. It's like everything everywhere is going crazy, so we don't go out anymore. We sit in the house, and slowly the world we are living in is getting smaller, and all we say is, 'Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials and I won't say anything. Just leave us alone.' Well, I'm not gonna leave you alone. I want you to get mad! I don't want you to protest. I don't want you to riot - I don't want you to write to your congressman because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first you've got to get mad. You've got to say, 'I'm a HUMAN BEING, God damn it! My life has VALUE!' So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, 'I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!' I want you to get up right now, sit up, go to your windows, open them and stick your head out and yell - 'I'm as mad as hell and I'm not going to take this anymore!' Things have got to change. But first, you've gotta get mad!... You've got to say, 'I'm as mad as hell, and I'm not going to take this anymore!' Then we'll figure out what to do about the depression and the inflation and the oil crisis. But first get up out of your chairs, open the window, stick your head out, and yell, and say it: "I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!"
From the movie, Network 1976.  Could anything be more fitting almost 40 years later? I'm glad that we have such an advanced society that can't even remember history from their own lifetime. Just crash the friggin system and put us into our FEMA camps already.
Jun 6, 2012 7:55PM
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anyone remember the argentine inflated their currency? one would need to use wheel barrel to haul their worthless money to purchase their essential need. will the yankee doing exactly the argentine did back in the '70. this fed reserve B. and G are the worse of the worse, no brain whatsoever how M supply works. you will think carter era was bad, wait until 30% to 60% inflation strike and interest rate goes to 30 to 50% very quick. US is mired in quicksand now, no one can bail this printing machine monster from its demise.
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