The Whipsaw Could Just Be Getting Started

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By all accounts the month of July has been very positive for the major stock market indexes. The SPDR Dow Jones Industrial Average (NYSE:DIA) is now higher by more than 7.0 percent from the early July low pivot. This is a sharp advance higher in less than a thirty day period for the markets. The big question that most traders and investors are now asking is, how much upside is left in the tank?

July is an earnings reporting period for most companies; thus far the results have been mixed. In the beginning of the month the street reacted poorly to most earnings releases despite the numbers or guidance reported. Alcoa (NYSE:AA), and Intel Corp (NASDAQ:INTC) both sold off after reporting better than expected earnings. Recently the street has been reacting better to earnings and economic news. Even companies such as International Business Machines (NYSE:IBM) has bounced back after initially getting pummeled after reporting earnings. You can almost feel the mood of the market changing its mind on a daily basis. It is important to note that the Dow Jones Industrial Average has staged four major reversal days since July 16th. This is a very rare event and shows the amount of uncertainty that is still in the marketplace.

The driving force in this market is not earnings or the economic news. Nor is it the Federal Reserve Bank talking of the next remedy they have in the medicine chest. It will not be the European bank's stress tests; it will not be any of these so called major events. It will be and has been one thing since 2008; it is the movement and action in the U.S. Dollar. When the dollar declines the markets inflate. When the dollar rallies the stocks markets around the world deflate. Personally, I believe it is that simple. Sometimes the stock markets will trade inverse to the dollar on a tick for tick basis. Other times the market will react inversely to the dollar on a daily basis. The end result is that the U.S. Dollar Index has dropped around 7.0 percent since the June high. It is rather ironic that the stock market is higher by 7.0 percent since the early July lows. It is all about the U.S. Dollar Index. The bottom line is when the dollar falls the stock market inflates.



Nicholas Santiago
Chief Market Strategist
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