I had taken the view that the US Stock Market would continue rising because the economy was awash with liquidity. I argued that since housing prices in the US had entered a bear phase, the only home for the surplus funds was stock market. I had further postulated that the bear market in US stocks would not begin until the FEDS raised rates; raise rates they would when the liquidity became reflected in the inflation figures. I had expected this to occur from March 2008. In the meantime, I had been looking for a new high.

With this idea as a background, I went long the ES on Nov 28 when the market provided a setup and trigger at the Primary Buy Zone.

This post sends up an amber flag to the context of my trade. The problem is the US$.

Lately everywhere I turn I find a piece on the possibility of the some country moving away from the US$ as its reserve currency or some talk about some country abolishing their US$ peg. At the same time, US officials are attempting to jaw bone up the currency.

At this stage, there seems to be little more than talk. The text following the Arab conference this weekend will probably produce little indication of the Arab states outlook but certainly any suggestion that Dubai and/or Saudi Arabia will decouple from the US$ will have adverse consequences on the dollar; consequences that would impact on my liquidity argument.

Add to this the the possibility that a creditor nation/nations now holding US$ debt decide that the US$ decline means they ought to liquidate their portfolio in whole or in part and you have possibility that the FEDS will be forced to raise rates earlier than expected to stop the US$ from free falling.

As I said, all scenarios: abandonment of the US$ as the reserve currency, liquidation of US debt portfolios, decoupling of US$ pegs, all belong to the ‘possible’ rather than the ‘probable’ realm. Nevertheless, it would be wise to keep an eye half cocked for any signs that the possible becomes the probable.

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