Dollar Stabilizes, but Likely a Sale

Existing homes sales delivered an upside surprise yesterday that elicited little market reaction. This group is something on the magnitude of 16 times larger than the new home market, but today's report of new home sales, which the consensus expects to be down 3.6% and offsetting a good part of the 4.8% increase in December, may also not do the greenback any favors. Given the heightened concern about cancellations, foreclosures, and various other underlying signs of fragility that have weighed on market sentiment, the market may be particularly sensitive to a negative-sign.

It is difficult to know with any degree of confidence how much of the equity market declines abroad is just playing catch-up to the U.S.' slide and what is new rot. However, it does not appear that real investors -- mutual funds and asset managers -- have panicked after yesterday's unsettling moves. This speaks to the resilience of the circuit of capital.

Assuming that the stability of the US equity markets holds today (admittedly a big assumption), developments would once again reinforce the notion that while capital markets are prone to lurches from time to time, there is no reward for panicking. While maintaining disciplined risk management practices, long-term investors, as opposed to short-term speculators, can weather the lurches. This is not to say that such strategies will always work, but rather the point is that every time it does work, it would seem to reinforce the behavior in a competitive/evolutionary way. This is also not to say the one- to two-day move is completed. Downdrafts over the last few years have generally lasted longer than a couple of days and have been of deeper magnitude.