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Wednesday’s announcement by the Federal Reserve that they are going to pump a further $600 million as part of a fiscal stimulus package to help boost the economy saw the dollar reeling down to it’s February lows.
No amount of sun seems to be shining on the green currency. Some like Robert Kiyosaki have referred to it as “trash” and they are justified.
The more the Feds print free money into the economy the weaker the dollar becomes. On Wednesday 3rd October, just before the FOMC statement, the Euro was racing higher against the dollar in extraordinary proportions.
A look at the US Dollar index chart (see above) shows that within a matter of hours after the FOMC statement, the US Dollar had fallen from 76.90 to 75.80 (by 10am on the 4th November).
The dead-cat bounce or bear rally that the Dollar is exhibiting for the moment will no doubt be short-lived.
The stock market on the other hand has had a major boost and the Dow rallied by over 200 points on Thursday breaking it’s April highs. This is expected as investors switch their money from currencies into stocks.
To say that a lot of Americans are becoming increasingly disenchanted with the way their currency is being “manipulated” is an understatement. There is obviously growing anger towards the Administration and the Feds for reducing the dollar’s value. This is good news however for tourists who are planning trips to the US this Christmas – with the Europeans and British expecting to buy goods at discount prices.
The next few months will be an interesting period to watch as to how the dollar will battle it out with the major markets.
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Updated 09 Nov 2010
September and October have seen some of the best rallies in the major markets so far, with the Dow Jones gaining 1200 points in the last 6 weeks. This has led to many analysts and investors speculating as to whether we could have a further rally to break the April highs – particularly significant for the S&P 500 which still has some way to go before it reaches those highs.
However, there are indications that investors are perhaps getting over-zealous and even “complacent”. In recent weeks the VIX (Options Volatility Index) reached new lows. The VIX is sometimes referred to as the market’s “fear gauge” – a measure of how investors are reacting to news and the overall volatility of the markets.
One thing that has become apparent is that the slightest avoidance of bad news seems to be pushing the markets higher. Even when bad news is released, if the news is still better than expected, we are seeing rallies in the markets.
It is worth noting that the last time VIX reached such lows was back in early April, just a few weeks before panic about the credit and financial status of Greece and others in the euro-zone gripped the markets.
By mid-May the VIX had spiked by 100% in its value – plunging the Dow and S&Ps to their lowest levels since January. Extreme over-sold readings were then showing on most of the market breadth indicators.
So could it be that we are getting complacent and should we be preparing ourselves for such volatile moves again?
That is anybody’s guess at the moment, although we doubt that we are going to experience the same degree of volatility we experienced in May.
However, earnings releases this week are sure to have an impact on the markets, and in particular the US markets. Between October 26th and November 2nd, the majority of US companies are going to be releasing earnings reports which is almost certainly going to have an impact on the market’s behaviour.
It is quite likely we may have a sell-off on the major indices and a pullback to the mid-September values, with the 200 day Moving average providing some support.
If you would like to learn some highly effective, yet simple to use indicators and strategies for investing, come along to one of our free seminars. We explain things in a way that even complete beginners with no financial background can understand and use in practice to help them succeed in the stock market.
Updated 12 Oct 2010
Magazines, newspapers and media "gurus" seem to perpetuate this false belief that during an economic downturn it is best to "hold" onto our stocks, or even avoid buying any shares whatsoever.
This really shows a fundamental ignorance of how the market behaves according to the economic cycle. In reality there are certain industries that still perform very well or even better during a recession. In fact, it would be foolish not to be investing in these industries as they can give you returns that far outperform the major markets and the negligible interest offered by most banks.
To explain further, it is known among some economists that three sectors tend to do particularly well in early contraction (this is the first stage of an economic downturn – also known as the “bust” stage).
These sectors are alcoholic beverages, hospital management, and tobacco. A joke that I have heard used is that during a recession people’s income is adversely affected, so they take to smoking more, drinking more and ending up in hospital!
As a real example, in the economic downturn of 2000 and 2001, investing in the hospital management industry would have returned 100% in just one year. Tobacco and alcoholic beverages would have returned 50% and 140% respectively in the same time period.
The majority of people who come on one of our Wealth Training Company stock market seminars are surprised at these results, as they too had probably believed that all industries do badly in an economic downturn.
And it doesn't end there. Do you think that perhaps in a recession people may still need water, electricity and gas? Absolutely! Investing in utilities may be a safe bet with slower returns, but it’s still better than putting your money into a bank and getting nothing.
If you want to have a huge advantage in your investing, you need get properly educated in knowing which stocks to buy at what stage of the economic cycle. In future articles, we shall be expanding on this topic some more. The Wealth Training Center offers free training seminars on stock market investing. We are happy to invite you to book your free place and attend.
Updated 21 Sept 2010