Take a good look at the chart above courtesy of "The Market Ticker." The secret to the equity markets' strength recently and perhaps going forward may be revealed by the downtrend highlighted.
Most of the conversations I've witnessed on the topic of the current market rally have centered around the recovery of the economy. I've heard countless arguments about earning rebounds and V shapes.
As readers of this blog it will come as no surprise to you that we at RCM would question the validity of V shapes. We would also caution against extreme excitement over EPS "surprises" and we would suggest there is a significant difference between inventory build and actual sales to consumers. The Intel "beat" should be taken with a Dell "miss" grain of salt.
However, I would like today to suggest that the whole Earnings argument may be mute. The real reason we are seeing equity prices inflate may be tied to the beginnings of the inflation trade. The chart above illustrates a rather precipitous slide in the ongoing demise of the US$. Since the beginning of March the dollar has dropped in value roughly 13%, which has coincided (or more appropriately expressed: created) an equity market reflation trade.
Keeping a close eye on this US$ trend and spending less time worrying about possible recoveries may be the best formula for investment success going forward.
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