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Strong Dollar—Strong Stocks?  Not Today

Is the short dollar/long commodities/long emerging markets trade over? It may not be over, but it is certainly tired.

I have often joked that some day, in the bright and shining future, the dollar and the stock market will go up on the same day.

That will happen, but it will not likely happen today.

Why not? There is simply too much money invested in the short dollar/long commodities/long emerging markets trade.

It means there is large amounts of money in commodities, and commodity stocks like metals and energy. If the dollar rallies significantly, It will take time to unwind this.

To be more cynical about it, the markets have run up 50 percent or more in anticipation of this kind of jobs recovery. So selling the news makes some sense.

I can be even more cynical and reflect the opinion of many in the hedge fund community:

1) the market is all momentum;

2) bad news has been good news for so long that any change to that thesis and corresponding outlook for the dollar, rates, etc. has to rock the boat.

3) the rally from the March lows is not about economic performance or earnings. It is all about hedge funds and banks getting to borrow from the Fed at 25 basis points and chasing risk with that money. That trade may now be more difficult.

4) Economic growth in 2010 is likely to be anemic and will not be a quick replacement for the money traders made on the short dollar trade. Intellectually, today's nonfarm payroll report is good news. But many traders believe that the economy will not grow as much as anticipated in 2010. That means stocks may have a tougher time.

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