The dolt mentality is alive and well on Wall Street.

The same guys who thought subprime securities were a sound long-term investment, who leveraged the real estate market up to the hilt, and then expected Wall Street to bail them out, now have a new guiding principle.

It goes something like this…

“The dollar is sinking, stocks are king again, so everything must be all good in the U.S. once again.”

As if your home currency hitting a 14-month low could ever be considered a “good thing.” But regardless, that’s how they’re thinking. (Dolts!)

Ironically, it’s that very dolt mentality that could spark a short-term dollar rally. The dollar is so oversold right now, and stocks are so overbought, that any hint of a correction could spark a surprise dollar rally later this year and into Q1.

As I explained yesterday, this would be a short-term dollar rally only.

Long-term, the dollar doesn’t have a chance. But for all you traders out there, a dollar rally could give you the opportunity to take some profit on your positions and even set up a few “pro-dollar” Forex trades.

For long-term investors, any coming dollar strength will give you the chance to get in on foreign currencies for the long haul on the cheap.

So what will spark this rally? Well, it looks like earnings season could draw the line in the sand for foreign currencies and stocks.

If Q3 earnings are poor, that could spark the much-needed correction in both the oversold dollar and skyrocketing stocks…

Earnings Season Could Prove the Dolts Wrong!

As I mentioned yesterday, earnings season has already begun.

Yesterday, we saw the first of the banks starting to report earnings. JP Morgan came out with a surprisingly healthy profit for the second quarter in a row.

But don’t let that fool you. Overall, I still believe that the results overall will disappoint Wall Street. And there are a few reasons for my belief…

First, the Wall Street Analysts are now buoyed in their optimism based on their estimates of Q2 being beat.

The CEO’s of Corporate America are also to blame here. After seeing their stock prices decimated in the past year, they are anxious to get them back into positive territory. So they’ll be drinking the Kool-Aid they are selling everyone.

In other words, they think the worst is over and all will be well going forward.

Next, the Q2 performance may be a very hard act to follow. The reason many companies had beat the estimate was due to cost cutting.

Now there is very little cost, if any, to cut. And the sales have not recovered much at all. So how does one beat optimistic estimates when your rescuer (cost cutting) has nothing else to offer and sales (top line) have been anemic in its recovery?

The answer – You will miss the estimates….

Get Set for Another “Flight to Safety” Pattern…

With the dolt mentality in place, the FX traders will watch the U.S. stock markets tank, fear will replace optimism, and they will all buy U.S. dollars and U.S. Treasuries in a “Flight to Safety” pattern.

We have seen this flight before last September when the whole financial mess was unfolding. The U.S. Dollar soared then.

And while this is completely counter-intuitive, I suspect we will see this happen again. It will not be as severe as last year, but I suspect this will happen again. We will have wasted the opportunity to learn, and will repeat our mistakes again.

History will repeat itself!

Bottom line: I would look for a dollar rally for the next two months. Traders, look to buy the buck, and sell risk (stocks/currencies) to profit!

Yours in FX Profits,
Ashish Advani

P.S. I’ve been preparing my Global Currency Options subscribers for this dollar rally for quite some time. We’ve even set up a special bear-bull strategy that lets us profit even if there’s a pullback in one of my favorite currencies in the market right now.