From the Barbers's Chair 2.6.2012

Of course the tough part is knowing when to switch trends. Wall Streeters use a million different indicators and ratios to try to figure this out, but as yet nobody has it down pat. Rather, all we can do is identify a major trend, and stay with it until is appears to be broken, and then move on. So what are the hot trends right now? What is going on out there that can make us some money? Market observers have commented on many trends that have been occurring for months. 

For example, one key trend has been the high correlation of asset classes over the past months. Historically, some assets classes—such as gold, various bonds, and certain commodities have been good hedges against stocks. They go up when stocks go down and vice-versa.  However, recently almost all assets classes have moved together—they go up together; they go down together. Is this trend continuing as we speak? Answer: uncertain. So far during 2012, certain market sectors (e.g. technology and banks), as well as bonds, haveclearly outperformed other investments (e.g. gold).  But whether the overall high correlation trend is broken remains uncertain. Another commonly discussed trend is the low volume in the markets and the vast amount of funds sitting on the sidelines. Certainly, these funds becoming more active could help the market. In the last few days, volume has moved up somewhat, but it is again uncertain how long the low-volume trend will last.

However, there is one key trend that has lasted for years, and for me is the most important trend to watch and to react to with your money. That trend has to do with action in the dollar. This dollar trend has been amazingly consistent over the past few months. Under this trend, there has been a very strong correlation between high markets and a weak dollar.  When the dollar is weak, markets go up.  When the dollar strengthens, markets go down.  This relationship has generally been holding true to form – day in and day out – month in and month out. This is the trend I am watching closest.Absent a Black Swan event, I believe that the markets will continue to do well as long as there is a weak dollar. While a strong dollar may be good for the US over the long term, a weak dollar helps stocks, gold, bonds, and commodities in the short term.  If the dollar strengthens, the markets may well act very negatively in response.Past trends are not necessarily indications of the future. However, investors disregard current trends at their peril. In my opinion, following a current trend is simply wise investing—until that trend changes course.  And right now the key trend out there is the weak dollar.  If this trend changes, my current bullish attitude will likely change very, very quickly. Please follow me on Twitter @USKOTM