P.I.G.S. fly away Bulls come out- Buy Dollar

With the Dow currently trading at 10430, and crude back at $80 the market has pushed forward the past week with the recovery in corporate earnings overcoming fears of sovereign debt defaults. Friday was a mixed day with options expiry causing unexpected market movements, defying usual correlations, and news of Bernanke raising the Fed discount rate for Banks, saw the market sell off and quickly recover (over the prospect that the move indicates a belief in the recovering economy).

Quotes:
FTSE 5378
Dow 10423
Crude 8025
EUR/USD 13681
GBP/USD 15570
Gold 1121
USD Index 8029

Weaker than expected news, with the UK failing to post a trade surplus for January, and continuing fears over the fiscal situation leading to weakness in the Pound.

Bearing this in mind. I think the underlying conditions are still weak in the global economy, however particularly in the US, with previously mentioned aspects such as availability of credit, consumer lending, and unemployment levels. Stocks can continue to rise as companies are able to produce better than forecast earnings, however how long can this continue? How will, what now seems to be, a closer exit strategy by the Fed, and higher interest rates affect small businesses?

Meredith Whitney stated earlier this week that she estimates bank earnings to be 30% below forecast, with higher capital requirements, and regulatory form, likely to reduce profit margins. The problem for banks is that loan default rates are still likely to be high, from "bad borrowers", and "good borrowers" aren't borrowing.

In the absence of new news relating to Government Defaults, with problems in Dubai, Greece, Italy, Portugal, and Spain, the market is likely to continue towards 10700, aiming to take out previous resistance.

However, given the number of bearish news event possibilities, I continue to be sceptical over the rally.



Gold has remained above its breakout wedge, and with 84% positive correlation to the S&P over a 1month time frame, I would be looking to go long gold at some stage, having opened up Sunday night at 1127.



However, I just don't feel like buying, right now.


Strategy:

Buy USD Index 8029, Stop 7968 Target 8130
The Dollar Index currently at 8029 is also good value in my opinion, with support at 7968 and near term resistance/target of 8139.