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The Mystery of the Dead Cat

by Rafael Rosa on October 20, 2010

market dead cat bounce The Mystery of the Dead CatDead cat or dying cats?

The dead cat phrase is being thrown everywhere today. However, it must be noted that there can only be one ‘dead cat bounce’ at play right now: the U.S. Dollar rebound.

While I have argued for a possible U.S. Dollar Index rebound, yesterday’s rally does seem dead-catish.

DX Dead Cat thumb The Mystery of the Dead Cat

Fueled by a Chinese rate hike and sub-par earnings from IBM and Apple, the US Dollar was able to gain some strength but is giving it all away today. Now, what would suggest it was a dead cat bounce yesterday?

The Pros:

* Yesterday, long-dated VIX instruments barely flinched as the market sold-off and everyone was panicking. I read this great post on the subject: (Vol says buy the Dips). According to today’s actions, the volatility traders were damn right.

*At the time of writing, there is pretty much a bearish engulfing candle today.

* The equities sell-off became more severe after the Bank Of America/NY Fed lawsuit news were released. Thus, based on rumor and uncertainty, selling intensified. However, the BofA news is old news.

The Cons:

* The Chinese rate hike is an important fundamental factor. It may suggest that the Chinese government is becoming severely worried about inflation, lending, and real estate prices.

China PMI will be released tonight (Asian session). It seems like this will be the game changer for now. A very high PMI would suggest more rate hikes and possibly get markets worried and vice-versa. The consensus for September is 3.6% annualized.

—–

Therefore, besides the China rate hike, most things point to a dead cat US Dollar.

If you believe today is the dead-cat bounce, you must then be talking about the possible dying cats:

S&P 500, Dow Jones, emerging markets, oil, gold, agricultural commodities, copper, and pretty much everything else.

In regard to currencies, the key thing will be to watch whether the EU/USD closes above the key 1.400 level. If it does, and Chinese PMI is subdued, then this Dollar cat could be post-funeral.


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