DOLLAR SEASONAL TRENDS DOMINATE MARKET

Our use of intermarket analysis has kept us on the right side of the changing trends of 2005. In our weekly report on March 13, 2005 we wrote: “The topping process in stocks may have ended this week as surging yields drained liquidity from the system. The dollar continued to selloff, but we view this simply as a “test” of the lows before the greenback rallies above its January highs, causing pain to stock market bulls.”
In fact, it is our work with the dollar and gold stocks that led us to believe that stocks would put in a major top in the first quarter of 2005. The ebb and flow of liquidity (as measured by gold stocks) has been an excellent indicator for the stock market as a whole.
Below is a chart of the XAU Gold and Silver Index that we originally published for readers of FxMoneyTrends.com on February 5, 2005. We said that if gold stocks represent “liquidity expectations,” then the XAU must rally to new highs with the broader stock market to confirm a continuation of the "reflation trade." If it does not, then we should expect a MAJOR top in both the XAU and the S&P 500.
As you can see, we forecasted a countertrend move in the XAU six weeks prior to the stock market top indicating that if the XAU failed to rally past its December highs it would not confirm new highs in the S&P500. In turn this would indicate to us it was finally safe to get short the stock market which we did do later that week.