Mr. Market's Mood Swings

The last week of trading has been quite remarkable in its major gyrations. It all started Thursday on renewed fears in Europe, carrying into Friday. Then on Saturday S&P downgraded the US from AAA to AA credit rating. We knew Monday would be ugly, and boy was it, down about -620 that day on the Dow. Relief rally Tuesday, followed by a major intraday swoon, ending with a strong rally after some comments by the Fed. Yesterday, Wed, we lost another -500. And today, Thursday, we have another monster rally of over 500 points.

So what did we do here at ACC? Mostly buying, every down day, particularly on Monday with the 600 point decline. We had raised cash levels for the most part in late April. From a technical perspective, it appears we need to close above 11,238 on the Dow to hold. In our last letter (see "Which Printer Do You Like More" post), we remarked that the "Dow Theory" needed to be confirmed to go higher (i.e. DJIA had to confirm the Transports and Utilities to move higher). It failed to do so, and the 50-day crossed under the 200-day line in what is known as a Death Cross. Now we have rallied higher, and again, technically, we think we need to re-establish the "line" at 11,238. We are 20 points away...so close...yet so far.

If we reach, hold, and clear this level of 11,238 it could bode well in the short term, though fundamental problems in Europe and the US will continue to surface on the Fear meter due to structural debt/entitlement issues. The ECB must hold the line and backstop Italy/Spain/Greece/Ireland/Portugal...if they fail on any ONE of these, they fail on all of them...Then look for the Fed to backstop the ECB...

Robert Mundell, Nobel-prize-winning economist, and Father of the Euro, was also Father of the idea of an International Monetary Unity (IMU). While we may not "formally" ever do this, given global animosity toward the US$ from China/Russia, et. al., it is a strong probability that someday, somehow, we "informally" end up with an IMU if the Fed ends up backstopping the ECB, and as multiple different central banks attempt to print their way out of trouble. We either end up with a "basket of currencies" approach (IMU), or perhaps equally probably, the US$ retains its reserve status...but the jury is out.