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Trends and Countertrends

October 3, 2008

With the ongoing doomed times and economic downturn,  bailout talks have enticed a few investors to have hopes for better times in the coming days. Tough hopes!

The essential issue at hand is not banking crisis or sub primes and other stuff. The canary in the mine is tweeting at “credit”. The demon called credit. Too much credit has a whole range of problems. Sub Prime, Prime, Super Prime,Credit Card Loans, Student Loans,and a whole range of problems.

So what distills away is that, what we have seen unfold is just the tip of the iceberg. Thank God! the sea is receding and we have seen at least the berg! But for this entire system to come out of this mess it will require at least mid 2009 to come up!

But speculations aside, there is no denying that the current trend is firmly downwards. Bearish, Southwards etc etc etc! And let me assure you, if US markets are as matured as I am thinking it to be, then 700 billion USD is going to be chicken feed for the bears and bulls.

But the moot point is not that bailout, but it is the trends and countertrends we wil be firmly seeing building up in the short term to mid term. Long term trend in global financial market is strongly downside. Bearish trend has firmly taken hold of the situation. But this bailout will temporarily start out a rally in the counter direction. This will hold on [fingers crossed] for a few weeks but again will lead to tracing back to the main trend.

But in its midst people and investors will be asking numerous questions:

  • Is it gonna work?
  • When is it gonna start working?
  • Is it then the end?
  • When will then the end come?
  • Will this lead to opening of a can of worms?

In short people are confused, and a figure of 700billion dollars pulled out of thin air ain’t gonna give people their dues back in such a short time. For the main trend to reverse, it is going to take truckloads of confidence and thats what  people are running short of.

But what is important in this scheme of things is that, this credit infusion will lead to some heavy buying in the stock markets. Albeit for a very small time. Most probably a few weeks. This will roll down to Sensex and Nifty with a lag of around 1-2 weeks[speculative].

But another facet is immensely significant in this scheme of things. With such heavy credit infusion, dollar is just on its scorching traceback. Something of the sort of dollar’s swan song. Dollar has unexpectedly risen, despite all fundamentals. And thats what worries me!

I have a few questions of my own :

  • Why has dollar risen when fundamentals look so weak?
  • Why is gold not showing the flair which we are expecting?
  • When will the barrel to ounce  ratio establish itself again?

So are we presently in a counter trend movement of dollar? Most probably yes! If yes, then what are its immediate consequences and when is it going to pan out? I dont know when is it going to pan out, but IMO I would like to be on the greenback’s ride down 🙂

Second question far more tricky than the first question. And I believe, the day dollar starts oozing red, gold will again establish itself. Lets wait and see. Dollar as of now, is at 47.

Barrel to ounce ratio is a popular ratio of discounting inflation from the data to find buying opportunities and selling opportunities in gold.

“Normally” the ratio is 8-10. That is, an ounce can buy around 8-10 barrels. At times goes to 20. At times it drops, but both the times doesnt stay there for long times.

So what comes up is today this ratio is skewed. Even if oil finds support at $80, gold is way way under.

Thing should sort themselves in the long run, but what remains is battling the crosswinds for small investors.

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One Comment leave one →
  1. Paulraj Madasamy permalink
    October 4, 2008 6:39 pm

    i hear ya.. loud and clear.. 😀

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