Notes on the dollar, and events of the week, also from Schaeffer:
Indicator of the Week: The Dollar
By Rocky White, Senior Quantitative Analyst
Foreword: If you've been keeping up with your reading, then I'm sure you have come across articles predicting a catastrophe for the U.S dollar. We've seen predictions of hyper inflation, and that the dollar could lose its status as the world's reserve currency. "Buy gold," seems to be the common advice. I'm not an expert on macroeconomics or the fundamentals of foreign exchange. But I can tell you from articles I've read and various reports and surveys that the sentiment on the greenback is overwhelmingly pessimistic.
The chart below shows the U.S. Dollar Index, which is a measure that compares the dollar to a basket of foreign currencies, graphed along with the S&P 500 Index (SPX). The price action of the dollar shows some cause for pessimism. It has been in a free fall ever since March, when the SPX began rallying. The negative sentiment means there is a lot of bad news already priced into the dollar. If this pessimism were to unwind for any reason, then we could get a reversal resulting in a fast and furious rally to the upside.
Graph of dollar index versus the S&P 500 Index
Option Activity: Huge option purchases on the PowerShares DB US Dollar Index Bullish (UUP) caught our eye recently. Below is a graph showing the average number of calls and puts bought to open on the International Securities Exchange and Chicago Board Options Exchange. (This is proprietary data from these two exchanges; it is not publicly available.) Call buying has been steadily increasing since August, and one day recently over 140,000 calls were purchased, causing a massive spike in the call/put ratio. Why the call buying if pessimism is so rampant? We are not convinced that this is speculative call buying, but instead might be hedging. As Todd Salamone pointed out in a recent email string to traders, evidence of this is the fact that the call buying has not been accompanied by strength in the underlying.
Graph showing the average number of calls and puts bought to open on the International Securities Exchange and Chicago Board Options Exchange
What are they hedging? Clearly, the calls could be the hedging of short dollar positions. However, there are other possibilities. There is a strong negative correlation between the dollar and commodities, including oil. Hedge funds love trading commodities, and they may have found that hedging with these UUP calls is cheaper than other alternatives. Also, check out the graph below. It shows the correlation of five-day return of the SPX and the U.S. Dollar Index. The 21-day moving average of the correlation has been negative for about 13 straight months now. That's the longest streak we've seen, and we have data on this since the early 1970s. Due to the consistent negative correlation, it's possible that managers are using these UUP calls to hedge long stock portfolios.
Graph the dollar-SPX correlation and its 21-day moving average
Implications: As contrarians, we think there is a bullish aspect to the extreme pessimism in the dollar. However, the negative price action of the dollar lessens the bullish implications of the sentiment. An unwinding of this negative sentiment could result in a strong reversal of the decline. Remember, "the crowd is right during the trend but wrong at both ends." As far as the call buying in UUP options, we will definitely be keeping our eyes and ears open on what can be driving this. As Bernie Schaeffer said in the email string mentioned above, "This is very interesting stuff with potential implications for gold, stocks and so forth."
This Week's Key Events: A Federal Open Market Committee Meeting and October Nonfarm Payrolls
By Joseph Hargett, Senior Equities Analyst
Here is a brief list of some of the key events for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective Web site for official reporting dates.
Monday
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The economic deluge doesn't let up this week, as Monday offers up September's construction spending, the Institute for Supply Management's (ISM) manufacturing index, and pending September home sales. The earnings calendar is also packed, with Cooper Tire & Rubber (CTB), Dean Foods Co. (DF), Ford Motor Co. (F), Humana Inc. (HUM), and Chesapeake Energy Corp. (CHK).
Tuesday
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On Tuesday, the Street will be graced with September factory orders and October auto sales. In earnings, American Tower Corp. (AMT), Energizer Holdings Inc. (ENR), Marvel Entertainment Inc. (MVL), Marathon Oil Corp. (MRO), Viacom Inc. (VIA), and Yamana Gold Inc. (AUY) are scheduled to report.
Wednesday
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The Challenger, Grey & Christmas job cuts report for October, the October ADP employment report, the ISM services index for October, weekly U.S. petroleum supplies, and the Federal Open Market Committee's (FOMC) decision on monetary policy are on tap for Wednesday. On the earnings front, we'll hear from Automatic Data Processing (ADP), Baker Hughes Inc. (BHI), Devon Energy Corp. (DVN), Garmin Ltd. (GRMN), Liz Claiborne Inc. (LIZ), Pulte Homes Inc. (PHM), Time Warner Inc. (TWX), Transocean LTD. (RIG), Cisco Systems Inc. (CSCO), Evergreen Solar Inc. (ESLR), News Corp. (NWS), QUALCOMM Inc. (QCOM), and Whole Foods Market Inc. (WFMI).
Thursday
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On Thursday, preliminary third-quarter productivity will be joined by weekly initial jobless claims. Elsewhere, Cardinal Health Inc. (CAH), Coeur d'Alene Mines Corp. (CDE), CVS Caremark Corp. (CVS), MGM MIRAGE (MGM), CBS Corp. (CBS), Crocs Inc. (CROX), NVIDIA Corp. (NVDA), and Starbucks Corp. (SBUX) will report earnings.
Friday
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We end the week with a bang on Friday, as September's wholesale inventories, September's consumer credit report, and the coup de grace, October's nonfarm payrolls, unemployment rate, average work week, and hourly earnings. Finally, the Street will see earnings from Edison International (EIX), and Suncor Energy Inc. (SU).
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insights about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox. |
