On Friday, 12/4/09, it was an unforeseen jobs report that decried unemployment had shifted from 10.2% to 10%. This past Friday, 12/11/09, it was the double-teaming of a surge in consumer confidence as well as a surprisingly robust gain for November's retail sales. Yet the impact on stock prices has become hauntingly familiar.
First, the market receives shockingly good news regarding the well-being of the U.S. economy. Stocks respond by racing higher at the open.
Then, it's the great rethink. Bond yields start creeping higher. The U.S. dollar strengthens. And fear/loathing over how long the Fed will wait to raise interest rates creates uncertainty about stock price sustainability.
Consider just how impactful the positive economic news has been. Only 3 times has PowerShares DB US Dollar Bullish Fund (UUP) ever seen 12,000,000 shares of purchasing interest... and 2 of those days are 12/4 and 12/11 as described above.
Trading volume of 12,000,000 shares for the PowerShares DB US Dollar Bullish Fund (UUP)? That's 3x (300%) greater than the 4 million shares typically trading hands. Not to be completely overlooked is the fact that the S&P 500 SPDR Trust (SPY) had 50% greater trading volume on 12/4/09.
In essence, a super resilient U.S. economy is not necessarily beneficial for stocks. Similarly, a double-dip recession would be equally troublesome (if not totally devastating). What the investment markets are looking to do is to continue climbing a wall of worry.... where things are good, but not too good.
On the surface, it may sound silly. Wouldn't investors want to see strong evidence of a true rebound in the largest economy in the world?
Nevertheless, current stock prices are being driven largely by what had seemed like a sure thing; specifically, the Fed's apprehension had been assuring ongoing weakness in the U.S. dollar. It has followed that investors could borrow the U.S. currency for nada and invest it in higher-yielding currencies or higher-appreciating stocks.
Now, some folks are thinking twice. With more interest entering the PowerShares DB US Dollar Bullish Fund (UUP), you're also seeing a number of folks selling a previously favored, high-yielding currency in the Australian dollar via the CurrencyShares Australia Dollar Trust (FXA).
Indeed, UUP and FXA have a -.97 correlation; this implies that they'll move in the exact opposite direction. Of course, the chart above paints a picture worth 10,000 words.
How concerned should we be that FXA is 4% off its highs and that UUP is 4% off its lows? It's hard to say, though it definitely bears watching closely.
The true tests for the U.S. markets (S&P 500) first come at the 50-day moving average circa 108 on the S&P 500 SPDR Trust (SPY). The second, and perhaps more critical correction test would come at support for SPY in an around 103.4.
If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show LIVE, via podcast or on your iPod.