The what: The U.S. Dollar has plummeted 36% against a basket of the world’s major currencies, including a record low against the euro.
Every glossy magazine from the New York Times to Newsweek proclaims that “The Incredible Shrinking Dollar” is set to “disappear.” At the same time, technology titan Bill Gates makes a rare public statement declaring, “The ol’ dollar, it’s gonna go down,” while Warren Buffet places a $21.4 Billion short position against the dollar versus a $ZERO position in 2002.
The when: How many say -- three days ago? -- Three weeks ago, perhaps?
Try three years ago, in December 2004. YET, just as the mainstream “experts” were hammering the final nail in the greenback’s coffin, the currency came alive on December 30, 2004. From there, the buck took step one in a long rally that tacked 15% onto its value.
By the end of 2005, in fact, Buffet’s Berkshire Hathaway Insurance Corp. had taken a $900 million hit on its bearish foreign currency investments.
POINT BEING: Time and again, market history shows that when sentiment toward a certain market becomes heavily one-sided, prices in that market are very likely to stage a reversal. For this reason, along with a plainly defined wave pattern, our December 2004 Elliott Wave Financial Forecast stood against the crowd with this bullish forecast for the buck:
“For the first time ever, we start with the US Dollar because the case for a bottom is an extraordinarily compelling one. The upside reversal should be measured in months, not weeks.”
Which isn’t to say -- When the bears wake up, it’s automatically time to look up. A normal dose of pessimism is not a strong buy signal. Sentiment must first cross the line into an outright extreme.
How can you tell when this has occurred?
Simple: Look for the unusual to become usual. Back in December 2004, dollar bearishness had become so ingrained that non-financial publications and the entertainment media alike were joining in the dollar doomsday chorus: 2004 saw Newsweek cover stories and even a groundbreaking “Saturday Night Live” skit that depicted a bullied dollar being teased and taunted by its brawnier counterparts.
Now, flash ahead to November 2007. The U.S. dollar has again plunged more than 30% to a new record low against the euro. And, in a never-before-seen development, bearish sentiment for the buck has spread into every corner from Capital Hill to -- well -- the Catwalk.
To wit: According to a November 5 Bloomberg, the latest face of Dead Dollar Inc. is not a business mogul, but rather bathing suit model Gisele Bundchen. For the world’s richest supermodel, the secret of Victoria is Sell the Greenback Now.
Well, in the words of the November 5 Short Term Update: “When a world famous Supermodel whose forte is walking down a runway wearing various styles of dress expresses an opinion about a financial market and that opinion is displayed prominently by a world-wide news service, odds are that some degree of extreme has been reached.”
And, one look at Short Term Update’s powerful close-up of the US Dollar Index versus the 5-day Daily Sentiment Index since January 2006 and the near-term message is clear: the buck is exhibiting “model” behavior for one kind of move.
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