Jean Temkin
8 December 2008
column
Johannesburg — BACKING my thought that the next bubble to burst may be the dollar, Michael Power, a strategist at Investec Asset Management, believes the dollar is in trouble and that the US position and status in the world economy is starting to fall.
"We should expect to see capital from the dollar, euro and yen zones start to migrate in search of greener pastures in emerging and frontier markets," said Power.
Believing that the economic crisis is providing an opportunity to reform the global market place, he suggests that the Singapore dollar could become the Swiss franc of Asia.
I have used a weekly plotting which shows the 25% gain in the dollar against the euro since July. But last week's extreme volatility left it almost 1% off its high, pushing its daily moving average convergence/divergence plotting (not shown) down through its moving average, signalling a short-term selling position.
According to the National Bureau for Economic Research (NBER), the US slipped into recession in December last year. This matches the chart plotting of the Dow Jones industrial index that reached its record high in October last year. At that stage, the dollar had lost 41% against the euro, but with commodities and assets still valued in dollars, it was recognised as the driver of the global economy. But for how much longer will it remain in the driver's seat? From October last year until July, the dollar lost a further 9% and the Dow another 24%. From October last year to date, the Dow has lost 39%.
Al Goldman, an analyst at Wachovia Securities, says: "The bigger picture remains a psychological tug of war between hope that the recession will end in six to nine months from now rather than several years."
According to NBER economists the recession will persist until the middle of next year. Gabriel Davel, CEO of SA's National Credit Regulator, suggests another five years. He points to the teaser-rate mortgages offered in the US and UK with initially low two-year payments that have not yet matured. Their maturity will usher in a fresh wave of defaulting.
The market will begin rising ahead of an economic up-kick. As the Dow is still the leader of markets, it is likely it will be the first index to achieve a sustained up-kick. Since it began falling, the Dow has experienced three "dead-cat bounces", short-term upward reversals within a bear trend. In charting, "three" is recognised as an important number as it often precedes change.
The JSE overall index continues the stomach-churning volatility we have experienced for the past two months, bouncing between 17800 and 22000. Until there is a substantial break through either of these two levels, it is impossible to project the forthcoming direction. Should that direction be down rather than the hoped-for up, there are some sectors that appear to be safe harbours in a storm.
While supermarket customers may settle for cheaper brands, food will still be bought. CBH has confirmed a bull trend, but shooting into an overbought position, it is, therefore, likely to ease. Afgri has bounced sharply upwards and is likely to gain more.
Tiger Brands and PNR Foods are in steady accumulation phases. Astral has given a buy signal and is likely to gain more.
Jean Temkin is the author of More Charting for Profit, a textbook on technical analysis.
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