Sell US stocks and buy the dollar (page 1 of 3)

However, even within a downtrend there can be countertrend rallies the same way there can be significant corrections within an uptrend. Right now the situation we find in financial markets is as follows. The US stock market and other stock markets around the world have risen from their late October lows in typical post election rallies.

However, it is quite common that these post election rallies fade out relatively soon, as was the case when Richard Nixon was elected in November 1972. This was followed by further strength but the stock market made its final high in January 1973 - slightly higher than in December 1972 - before entering a devastating two years' bear market.

Mid-December correction

Since, at present, the US and also other stock markets around the world have become significantly overbought amidst record bullish investors' sentiment it is very likely that either a top is already in place or about to occur within days, which should be followed by a correction of around 5% at the very least and lasting into mid December.

From a mid December low we should then get a year end rally into January, whereby I am expecting that numerous technical indicators will fail to better their current high readings. This should then lead to a more pronounced downturn into February.

It is, however, important to remember that whereas the US stock market is up by around 40% from its October 2002 low, in Euro terms it has hardly risen because the dollar has almost declined by 40% against the Euro since 2002. So if Mr Greenspan decides to carry on with his irresponsible monetary policies it is possible that in dollar terms the stock market will continue to rally but it would likely fail to move up much in Euro terms since more of the same Greenspan monetary policies, as he implemented in the past, would lead to an even weaker dollar.

As a side I may mention that the US economy is far from the 'New Economy' which was relentlessly broadcasted by the high tech apostles who led their investors into incurring devastating losses following the bursting of the NASDAQ bubble. In my opinion, the US economy increasingly resembles a 'Banana Republic' economy a la Latin America in the 1980s (the present US administration increasingly exhibits some similarities to dictatorial Banana Republic leaders as well).

At that time Latin American countries tried to cushion the end of the flow of petrodollars after 1980 by increasing their budget deficits and by printing relentlessly money. This then led to rising trade and current account deficits, hyperinflation and a collapse in their currencies as well as their economies.

The result was that in local currencies the stock markets rose throughout the 1980s, but that in dollars - then a strong currency - they lost 80% or more of their value. Needless to mention that Latin American local bond markets were in the 1980s' hyperinflation period a total wipe out! Therefore, if the US economy moves in character closer to Latin American economies, US bonds should now be sold.

Dollar over-sold

Above I mentioned that the US stock market is now - in the near term at least - in significant over-bought territory. The opposite seems to be the case for the US dollar, which has now reached an extremely over-sold position. I recently attended several investors' conferences and everywhere and from everyone I only hear US dollar bashing and that the US dollar will decline further.

As a contrarian this makes me skeptical since usually universal bearishness leads to rallies while universal optimism leads to disappointments.