Mar 29, 2005

Signs of a Hard Landing?

I just finished reading econoblog at the WSJ featuring Nouriel Roubini and David Altig. It was a thorough debate on the USD / foreign borrowing dilemma but it did not really cover much new ground. Probably just seemed that way to me because they have both been talking about the topic for quite a while on their respective blogs.

Their discussion was whittled down at the end to whether a fall in the dollar due to a lack of foreign central bank demand would necessarily lead to a hard landing. I was left with a feeling of irony because right here the world seems to be tilting towards a hard landing (or at least the sudden fear of a hard landing) but it is not because of the dollar. Instead it stems from new found inflation fears, higher interest rates, and some credit issues at GM (maybe AIG, FNM, C...). If these trends continue the next big risk I see in the pipeline is clearly the housing market. The housing market has gained increased importance in this economic cycle because of the impact of refinancings on consumption. Interest rates may become range bound for a little while but even so it seems like the demand for housing is going to pull back and perhaps be overwhelmed by supply. Charts of the housing stocks show a lot of room before next support.

For the stock market, I tend to agree with Barry Ritholtz that we are seeing the sort of deterioration in internals associated with at least medium-term weakness. Check out the McClellan summation and notice how much weaker it appears than the market. I also like to watch the percentage of NYSE stocks above their 200 DMA which is currently hitting levels not seen since last May (59%). I am still long some post FOMC purchases but am shortening my original horizon of 2-3 weeks to be flat by the end of this week. A pullback tomorrow does seem likely but if stocks can stay above Thursday's lows maybe we can get a better rally into the end of the week. The rally may go longer but I want to position myself to be net short and not be trapped long if the rally fails abruptly.

Circling back to currencies the dollar is going to challenge its downtrend line very shortly with its 200 day MA sitting just above that. It might try to shake things up by getting through those levels for a short time (and maybe DXY 85.45 as well) but within the next 3 weeks I imagine it will again be headed lower. Commodities are taking a well deserved rest / pullback while some related commodity stocks look pretty ugly for the short term. Maybe a buying opportunity but like the dollar I would act over weeks rather than days.

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