During the corrective phase in `04 market momentum was stifled by the dollar rally out of the yearly cycle low in Jan.
We are in a similar situation right now as the dollar has rallied out of another yearly cycle low. The rally began when the Dec. jobs number came in much better than anyone expected. Traders used that positive news to cover shorts and end one of the longer down legs in history for the beleaguered dollar under the assumption that the Fed would be raising rates sooner rather than later.
This month however it's a different story as the Jan. jobs data didn't confirm the rosy picture from last month. Traders are now wondering if it's really that wise to buy the dollar. In the last year the Fed has spent, lent or guaranteed 11 trillion dollars. Money they created out of thin air. With that kind of insane supply does it really make sense to bid up the value of the dollar? In reality it is going to be politically impossible for the Fed to raise rates with unemployment still above 10%. (And no real possibility for much improvement as we can't blow another tech or real estate bubble to create jobs anymore.)
The fledgling rally in the dollar already looks like it may be running into trouble. If the dollar does roll over quickly it's going to act to support the markets and make it tougher for the correction to unfold. Unfortunately it's also going to support the massive inflationary pressures I'm expecting during the first half of this year.
My conclusion is that the market may resist the correction but I expect the resulting inflationary storm to ultimately put an end to this cyclical bull much sooner than many are expecting. I doubt this cyclical bull will make it past three uplegs and I think there is a strong possibility we will see a final top sometime later this year.
Right now I'm closely watching how the intermediate cycle in the dollar unfolds as it will probably determine the fate of not only the stock market but also the global economy going forward.
There are going to be consequences to printing 11 trillion dollars... and they aren't going to be good.
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