Market Direction

With the markets being the way that have been these past couple of months, I've been sitting on the sidelines waiting for the opportunity to get in on the ground floor of the next bull market, whenever that is. I've been looking for patterns in the way money has been flowing and have found a few interesting ones for which I think this market may be heading.

For one, I have been somewhat baffled by the strenght of the US dollar versus most of the world currencies, but once you look closer it does make sense. With the end of the year approaching, hedge funds and mutual funds liquidating their assets and those who are locking in their losses for the year, there seems to be only one solid place to put your cash and that is in US treasuries. And with the amount of long bonds being issued by the US government there is more than an adequate supply to satisfy the demand. As a result there is an inordinate demand for the US dollar which in turn is pressuring it up.

At the same time, the US government is literally trying to print its way out of the financial crisis as is so many other governments. In my opinion, this can only lead to massive inflation. There is talk about deflation, but I will get to that in a moment. When the US government announced today it was pumping 20 billion into Citi Group and guaranteeing 360 billion in bad debt it basically told the market "No bank will fail" With that promised, why wouldn't you want to put your money back into the market, there is little to no chance your company would fail.

With that you saw money flowing out of the bond market and into equities, and thus fell the demand for US dollars. At one point it lost 4 cents to the Canadian dollar. And, with the drop in the dollar, so jumps the price of oil, because you could by more oil with the cheaper dollar. Gold also jumped up in price and so did the companies that deal with it.

One such company I am following is Freeport McMoran (FCX) on the NYSE. It was up 13.5% today because of gold and copper.

To me, this was a sign that comodities are the place to park my money. Deflation, in my opinion, only appears because we have had a massive drop in commodity prices. But I believe commodities will be the first to recover once it starts. That is because once the debt of the US has to be dealt with the US dollar will sink and money will be flowing into the only safe haven there is, commodities. And with most comodities being traded in US dollars, as the dollar becomes less valuable you will be able to buy more with it, thus increasing the demand.

I also think that the market has overestimated the drop in demand from China. Even in its slowdown it is still growing at breakneck speed. 6-8% growth is still incredible. And the Chinese are loaded with cash. They could have numerous economic stimulus packages and still have money in the bank. I'm also watching China very closeley, as I think it will be them, and not the US consumer that pulls us out of a recession.

The Chinese middle class is growing and they will not want to give up their new found wealth. China needs oil, minerals and lumber to fuel their growth, that will not change. Canada is poised to fill that need.

So what I saw happen in the market today confirms my thoughts. Is this the beginning of that? I don't think so, as there is too much more bad news to be digested by the market, but these are the indicators I will be keeping a close eye on.

If anyone is reading this and has an opinion, please don't be shy, share it with me.