Its time to be very defensive, if you haven’t already taken some action to protect your profits. The stock market “internals” are very weak, with the Dow Transports, and now the NASDAQ , breaking some key support levels. Dennis Gartman, producer of the daily “Gartman Letter” is a widely renowed technical trader and his interview yesterday on CNBC, gives us some insight into the Dow Theory and the implications behind the Dow Transports technical breakdown. Click on the link to view:
The “lopsided” trade that I mentioned in my previous blog, is now a daily discussion on CNBC, with Art Cashin (head of floor operations at UBS and daily commentator) has outlined that the US “carry trade” is very vulnerable to a correction, as large institutional investors have been borrowing large amounts of US dollars, and investing them in foreign currencies to pocket the higher interest rates and to benefit from the declining US dollar (or rising foreign currency). Unfortunately, as the US dollar strengthens (as we have seen in the last 2 days) , these investors are forced to buy US dollars to repay their borrowings (before they absorb any losses from a rising US dollar).
This “short-covering” can be very, very volatile and cause a dramatic increase in the US dollar. Since commodities and the US stock market have been so correlated with the dollar, expect the US stock market and the commodities to have a violent correction (like we have seen yesterday and today).
As most of the “street” is short the US dollar, this volatility is more likely to get worse, before its gets better.
