August Drama Is Just Heating Up

The stock market indexes all surged higher yesterday clearing above important technical resistance levels. Yesterday's rally higher was broad based and very powerful point wise. At face value it looked very impressive. The catalyst for the rally yesterday was a strong Chinese market and a weak U.S. Dollar Index. This seems to be the perfect short term elixir for stock market upside. Who would have ever believed that a stronger Chinese economy would benefit the United States? Who would have ever believed that a weaker U.S. Dollar would really benefit the United States in the long run. The truth of the matter is that these are just short term or temporary fixes to the United States economy. The goal for the U.S. Treasury and the Federal Reserve Bank is to inflate the economy back to health. This has been tried by many other countries prior with very little success. Japan is the most notable government that has tried to fight deflation with artificial inflation and they have basically flat lined for the past 20 years. What will happen to the United States if China stops growing at a double digit rate? What will happen if the U.S. consumer stops buying so many Chinese goods. The U.S. consumer seems to hold all the cards as they are the largest consumer of goods in the world and consumer spending accounts for up to seventy percent of the GDP in the United States. China is now facing many headwinds as they have been growing for many years now. Recently China faced an uprising from several workers in the auto industry. Honda Motors LTD HMC auto workers staged a strike over wage increases and work conditions. Similar disputes have emerged with Toyota Motors Corp TM, and Bayerische Motoren Werke AG(BMW) workers. The Chinese government has also had a long dispute with Google Inc GOOG over censorship which is extremely important worldwide. These are just some of the problems that are beginning to emerge as this large Chinese economy matures. Double digit growth will not last forever as the new middle class begins to grow and will demand more pay and better work conditions. Last night the Shanghai Index traded lower by 1.71%. Today the U.S. stock market is trading slightly lower retracing some of yesterday's huge advance. Today the U.S. Dollar Index is trading lower by 0.25 cents to $80.67. The weaker dollar will usually help to inflate the stock market higher. When the dollar declines commodity stocks such as Southern Copper Corp SCCO, and AK Steel Holdings Corp AKS will usually jump higher. However, should the dollar rally higher these stocks will usually decline and sell off. The month of August will not be the normal summer doldrums as the Chinese market will come under the microscope and the U.S. Dollar Index will be nearing important daily chart support levels. Stay tuned the next few weeks should be filled with volatility. Chart from CNBC.com Nicholas Santiago Chief Market Strategist www.InTheMoneyStocks.com