MM May 27

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Saved by the Euro

By Michael Markowski

After opening down over 200 points yesterday morning the Dow Industrial Composite index rallied in the afternoon and closed down only by 22 points.

Many of the pundits on TV and radio attributed the market’s resilience as a sign that the sharp correction during May of 2010 is coming to an end and that it is now the time to get back into the stock market.

I vehemently disagree. The Dow and S&P 500’s strong recovery late yesterday after they made new 2010 lows earlier in the day coincided with a sharp increase in the Euro. After it hit four year lows against the U.S. Dollar and a eight-year low against the Japanese Yen yesterday morning it mounted a significant rally yesterday afternoon.

The chart below depicts the price action and relationship between the Euro and the Dow 30 Industrials over the last 30 days. It tells the whole story.

As I have said previously, the Euro will act no differently than the shares of any company, which has experienced a significant financial reversal. Therefore, I predict that it is inevitable that the Euro will fall to new all time lows versus the U.S. Dollar before this Super or secular bear market is over. A decline to new all time lows would equate to a 30% re-adjustment for the Euro from its present levels versus the U.S. Dollar. Such a move would wreak havoc in the U.S. stock market. The major indices such as the S&P 500 and Dow 30 Industrials would likely experience declines of at least 30% from their present levels.

Those who have short-term investment horizons or who are day trading should keep a watchful eye on the Euro’s action against the Dollar. They should especially pay close attention to the intra day reversals because they will provide both short and long trading opportunities.

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