It's Time to Go Long the Buck

Three weeks ago, we discussed the possibility the the dollar was bottoming and poised for a major rally.

My reasoning was that:

• Sentiment was overwhelmingly negative on the buck. I noticed that even traditional contrarian investment sources appeared to be piling on. When there's nobody left to sell, that's usually a good sign that the bottom is in.

• We still appear to be in a period of debt deflation, which the Federal Reserve is basically helpless in preventing, because we have a credit based system. When credit goes away, it's gone forever. You can't print credit.

• The Japanese Central Bank, despite its best efforts, was ultimately unable to produce inflation since their credit bubble popped in 1990. And if the old joke is that their central bank was so incompetent that it couldn't destroy its own currency, I didn't know why ours would be any different.

What's happened in the last few weeks?

Pulling up the chart, the dollar appears to be forming a bottom. The 77 mark has held:

Is the buck bottoming?

(Source: Barchart.com)

The equity and commodity markets look toppy. Investor sentiment is overwhelmingly bullish. The AAII index, a very reliable contrarian indicator, is at levels not seen since November 2007.

Furthermore, China, the posterchild of this rally, has turned down - the Shanghai Index rolled over a few weeks ago...along with several key commodities. Gold is yet to break $1,000 decisively, despite the widespread belief that the Fed has successfully created inflation.

Add it all up, and we've got some very bearish pieces staring us in the face. And if we do see another massive deflationary wave down...is there any reason to believe it will behave differently than the last?

I don't think so. So I'm taking some cues from the markets, and positioning myself in the only asset that held up and even rallied the last time around - the US dollar.

Take Note When Bears are Bullish

One of our astute readers took me to task when I said Robert Prechter was not a perma-bear. In fact, this reader made a very good case, pulling up some old doomsday calls of Prechter's that look silly in hindsight.

We had a good back and forth debate - I accepted his points, but added that Prechter has called this rally to a tee, which was a bullish call.

Ultimately our reader summed it up perfectly:

Funny thing is he has called 2 rallies well 1980s bull market and this most recent rally.

He gets in trouble once he goes bearish (which he has been 18 of the last 20 years). Had he gotten away from this stupid (dow 400, great depression II) perma outlook of his, he would be much better. Then again, maybe its this permabearishness that somehow, someway gives him the ability to call rallies.

Maybe the real take away - the lesson of the last 20 years, is heed his calls of rally, ignore his calls of doom. Imagine how well we would have done!!! ;

A hilarious, and very insightful conclusion! We should especially take heed when the bearish types turn bullish!

I suppose the counterpoint would also be a wise one - be wary when perma-bulls turn bearish!

Positions Update

Still holding cotton - barely - and now we're taking a flyer on the buck.

It's tough to sell cotton here - and also tough to get excited about it. In a healthy global economy, cotton's fundamentals would appear to justify higher prices right now. The fact that we don't have them gives me pause that something is amiss - perhaps cotton is telling us that things may not be so fine and dandy.

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Current Account Value: $23,891.64

Cashed out: $20,000.00
Total value: $43,891.64
Weekly return: -2.0%
2009 YTD return: -53.0% (Yikes)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000