Key on the $US Dollar Index Versus the SPX

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

The SPX declined -5.5% in 5 days to the 20DEMA and bounced +3.0% yesterday to go out at 909.71. When energy and financials lead like they did yesterday with the BKX +7.5, XBD +6.1, OIH +4.8, and the XLE +3.5, there is usually a trend up day.

NYSE volume was moderate at 1.42 bill shs, but it was all one sided as the volume ratio was 93 and breadth +2408. There was no news of significance yesterday, just the usual Q1 "better than expected earnings", but the empty suits on CNBC fail to tell you that the EPS had been reduced for example, 3 times from .50 to .20, and the reported was +10% better than expected to a +.22 However, few of the S&P companies reporting for Q1 beat revenue estimates, which is a much less compelling picture.

Companies are cutting expenses significantly which is an unsustainable approach to profitability, so unless there is a robust bounce in the second half of 2009, there will be no benefit to the operating leverage being created by slashing expenses with no revenue growth. The consensus is almost unanimous about a second half recovery, so how confident are you about that seeing that this same consensus was clueless about the rapid decline in the economy

Bernanke has been jawboning about the end of the recession in the second half of 2009 for about a month now, but he was also the guy that told us that the sub prime mortgage crisis was not going to be a problem relative to its effect on GDP, so how much credence should one put in his prognosis, especially with the Obama administrations current policies that will destroy the $US dollar, and lead to significant inflation that will send the economy into a much deeper hole.

The primary focus in the Trading Service continues to be the commodity related sectors, technology, and selected industrial stocks. The SPX and INDU remain above their rising 20 and 50DEMA's, so the pullback doesn't turn into a significant correction (Wave 2 leg) until they get taken out. The QQQQ closed back above its 200DEMA yesterday, and it is the only major index that has closed above its 200DEMA during this rally off the SPX 667 low (3/6/09). The XLE and OIH also bounced of their 20DEMA's after both traded at their 200DEMA's on 5/8 and 5/7.

The USD (U.S. Dollar Index) closed at 82.60, just below its 82.98 200DEMA after a decline from the 89.62 high on 3/4/09, which was in tandem with the SPX +39.5% rally off the 3/6/09 667 low. Also, the USD made a significant low at 77.69 on 12/18/08, preceding the rally to that 89.62 high, and the SPX declined -29.3% from the 944 high on 1/6/09 to the 3/4/09 667 low. If the USD turns up from here the odds favor a decline in the SPX if the current relationship holds up.

Have a good trading day!

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