Risk on trade is on.
Stocks up, dollar down, gold up.
Next year comes the storm.

S&P/Gold/Greenback

Meanwhile, back at the headquarters of my for profit think tank, I read George’s book today, The Crash of 2008 and What It Means. If you are interested in his view of the inter-market relationships and forces that were in place during the banking collapse last year, I recommend it. He traded actively during 2008, and he lays out the thought process(es) behind his positioning. He is a decent critic of himself in that he admits to many mistakes. He ended 2008 “modestly higher”, which he considers an accomplishment in a “period of almost universal wealth destruction.”

He candidly admits to missing the largest part of the crash, “Although I am an experienced short seller, I got caught several times, and in the end I largely missed the biggest downdraft, which came in October and November.”

He also talks to being slow to recognize the trend reversal (strength) in the dollar, causing him to give back profits. “Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense, the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system.”

While the collapse was decently predicted, the rush to the dollar caught most off guard. Most traders–even the ones that made a killing being short the mortgage and mortgage related markets–would agree: it was surprising that the risk aversion trade became buying the dollar–the currency at the center of the collapse.

Green Energy

As the housing bubble that led to the collapse of 2008 deflates, another is being built. The massive investment in cleaner, more efficient distribution of energy is the next great growth industry. I invest heavily in energy. It is, after all, the mother of all markets. I’ll end with my favorite line of the book:

“Nothing is quite as profitable as investing in an early-stage bubble.”

And the beat goes on.

Back in September, I outlined how the S&P is gunned higher by buying the Euro Yen (EURJPY) spread against the US dollar.

The chart below shows the spread on the daily timeframe. This spread, along with many other inter-market relationships, are shaping my outlook into year end: The S&P and precious metals will be extremely strong and the weakness in the US dollar will continue.

EURJPY

My posture on the dollar was bullish. I thought we were due for a spike that would catch traders off guard, causing the risk off trade–S&P weakness. However, as chronicled here, a phone call from Japan changed my market outlook. I was alerted that sovereign default swaps had widened, signaling dollar weakness to come.

With the S&P and the metals gunned into year end with dollar weakness, we can take advantage of the upside to build energy for the sell-off of 2010. The crash of 2009 has officially been postponed. The downside in equities will be fierce when the dollar does catch a bid. At some point it will. Just when it is least expected. Like life, trading comes down to the most important x factor of all: timing.

And the beat goes on.

Spooz, dollars a bore.
Amazon, gold, Priceline will soar.
Parlaying gains more.

Priceline - Daily

Market Rap 9.November.2009

The risk on trade was
on. Stocks strong, dollar weak as
gold keeps shining on.

S&P 500 - Daily

Spot Gold - Daily