The Insightful Trader

Dollar Plunges – Gold Screams Higher on Fed Move

by on Mar.19, 2009, under Market Commentary

The dollar made one of its largest one day drops ever as gold, on the verge of breaking near term support earlier in the day, rebounded over $35 on the Fed’s surprise move yesterday. The Fed’s move to throw another $750 billion into the mortgage market, as well as to announce they were definitely going to be purchasing treasuries, after jaw-boning about it for months had some serious implications in the markets.

The Fed, in effect, is saying that they’re not worried about inflation at this point, if ever, and that lower rates are here to stay for awhile. The dollar propmptly dropped nearly 500 points against the Euro almost ieurusd-30min-18mar09mmediately (see chart).

 

 Gold meanwhile ,which was down nearly 4% prior to the announcement was almost 3% HIGHER after and silver, which had been down 5%, ended up approxiately 1% higher. So some absolutely huge moves in the currency and precious metals market. Pity the traders that took late lunches yesterday because the reaction was swift and deadly if you were on the wrong side of some of those markets. Seems there is some concern amongst the Fed that perhaps things weren’t recovering or looking good enough for the end of the year. Perhaps we should have done a better job of interpeting Bernacke’s comments on his TV interview when he said he saw the economy recovering by year end. He forgot to mention that he was planning on bringing a loaded gun to the meeting that the rest of us didn’t know about.

The stock market response was rather muted compared to the other markets. After being down initially in the am after a spectacular day prior, they gradually climbed the rest of the day heading into the release. Once the release was made, we had 3 violent moves, first up, then down as profit taking ensued, and then back up to close +90 on the Dow. Once again the financials were huge winners and why not. The Fed is giving them a license to print money, and that may be the main tactic here, to let them earn their way out of trouble, much like what happened in the South American debacle in the 80’s. Many of the financials, including the XLF were up in excess of 10% after the announcement. Hell, even AIG was up 40% and C closed up .69 which is a lot on a $3 stock and FRE and FNM were two of the biggest gainers percentage wise, both up about 80% on the day. GS, which had been langusihing all day, spiked up nearly $6 to close at its highest level since October. Of course the big losers on the day were SKF and FAZ which both got hit for about 20% of their value.

In other market news, the techs were again strong with IBM’s announcement of interest in acquiring JAVA, which was up in excess of 50% as a result. The SMH had another good day as did BRCM, INTC and KLAC. Oil and drilling stocks continue strong as oil is close to taking out resistance at the $50 level. FSLR had a glowing day, up nearly 10 points for awhile before succumbing to some late profit taking and PBR, one of my favorites, continues to climb, up nearly 100% now since its low in late November.

Now the fun part begins. As I stated a wek or so ago, the 800 level on the S&P is our first real resistance level, and its notable that we hit an intraday high yesterday at 803 before closing at 794. The short term bulls definitely have the bit in their teeth, I thought Cramer was going to have the big one he was so enthusiastic about the Fed’s moves. So it’s going to be real interesting to see what happens the next few days. This low 800 level is pretty formidable resistance and I expect we may get a slight pullback to gather some re-inforcements before we can storm over it. But in a rapidly becoming government controlled market, who knows, we may gap right over, but I think not. I’m still bullish for the short term, but as I’ve said several times, it’s not going to be a smooth ride.

spx-daily-18mar09

 PS: An updated currency chart from early this am and gold chart:

euro-updated-19mar

gold-19mar09

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