Wave Signals Commentary

CRITICAL MASS?
Mike Drakulich
I normally write about the stock market, but on this holiday shortened session I am going to talk about the dollar, which is making major new lows this morning (see chart). And my current Elliott Wave interpretation suggests the dollars current decline could "rather soon" see the dollar index in the low 80s (now at 90.10). Why is this possibly so important? Because I think we are getting close to "critical mass", that point where a continuing dollar decline could really start to effect many investors "perception and reality" of wanting to own or buy more U.S. assets. Obviously the U.S. has huge twin deficits to finance(over a trillion a year), the current account and budget deficits. If foreigners simply decide to reduce their level of buying of U.S. Bonds, that could result in a big spike up in interest rates. And foreign governments, particularly in Asia, already hold huge amounts of U.S. debt instruments and dollars. A very recent report showed in one month foreign buying of U.S Bonds/stocks declined to around 5 billion, from 45 billion the month before! "If" this is the beginning of a trend, and I stress "if', then the incredibly important "perception" of investing in the U.S., could see a dramatic sea change. And it could not occur at a worse time for the U.S, given our horrific and growing twin deficits. That is the reason for my recent focus on the dollar, which also could have "domino" effects on Gold and Bonds, and yes, even eventually the stock market.

If this "critical mass" dollar scenario does unfold, I believe it would also be a big negative for the U.S. debt market. In June we saw what was very likely THE long term low in interest rates (highs in Note and Bond Futures), and I am referring to the 10-year Treasury Note yields. We have in recent weeks and months seen a consolidation/correction of that initial large "interest rate rally", which in my work was the first major up leg in rates, with much more to come. And my analysis of the recent action is that the recent corrective decline has likely ended, and another major up leg in interest rates (decline in Note/Bond Futures) is very possibly underway. This morning we are seeing Treasury Notes and Bonds decline significantly with the dollar. And the Treasury Notes this morning are lower and are approaching a key up trend line (see chart). There is a very bearish Elliott wave pattern unfolding (my preferred count) that suggests the next major leg down in Treasury Notes (rates rising) is getting underway. So the Notes/Bonds are very possibly going to "join" the dollar to the downside.

And we will see how all this effects the stock market which as we all know, "appears" bulletproof to anything. It is hard to really judge anything on a shortened day like today, and a week like this. Many indices are again at/near rally highs, but when I look over all the Elliott wave patterns and market technicals, it is very hard to envision a significant Bullish outcome from current levels. I think everything remains is place and strongly supports the case for an important top being made. What we are trying to identify is the completion of the rally from the March lows, and I think it is getting closer and closer to being done.


Mike Drakulich

December 1, 2003

Mike Drakulich is editor of the Wave Signals Email newsletter. wave@bendcable.com