The dollar has been decimated over the last six months as investors have piled into global stock markets. In hindsight, the risk seems to have been worth it, with stock markets in the US, China and Europe exceeding gains of 50% since the March 2009 lows. There has been much talk of correction or crash since stocks began to rise, to no avail. Markets, regardless of forward looking economic fundamentals, have continued to edge up.

In March 2009, the daily sentiment index showed there were 2% bulls. Today, we have the opposite extreme, with a 90% investor bullishness. As the dollar collapsed during the stock market rally, sentiment has also swung to the opposite extreme. Dollar bulls are few and far between, as indicated by the 95% bearish sentiment as of late September.

While it seems that most market participants are looking for a continued rise in stock prices and deterioration of the US Dollar in the near-term, leading contrarian investors like Karl Denninger, Marc Faber, Bob Hoye and Harry Dent have a different take.

On Friday, October 23, 2009, economist and cyclical forecaster Harry Dent of HS Dent Investments advised his subscribers that markets are at a critical juncture:

Two things happened today that suggest we will see a correction near term as we have been expecting. First, the markets reversed down after very good earnings news late yesterday. Second, the Dow Transports did not make a new high recently and is reversing down faster. This correction will be critical as it is possible we could see a sharper crash ahead if the markets have topped. But if we don’t break clearly below 9,200 by mid-November or so, then we could see the markets continue to edge up as late as December or February..

Dent’s recommendations for investors who would like to trade this market continue to be the S&P 500 unleveraged inverse ETF (SH) and the US Dollar long ETF (UUP), both of which will benefit from a rising dollar and collapsing stock market.

Karl Denninger, of the Market Ticker, has also turned bullish on the dollar, as discussed in his recent post Possible Credit Dislocation: Be Warned. Denninger may be reading the sentiment indexes as well, but his assessment is based moreso on assessments in the credit markets.

I have reason to suspect that the “monetary transmission mechanism” is full of rocks (again), and we are about to have another instance of what could colloquially be called “fun.” (Yes, that’s sarcasm.)

Denninger’s forecast:

If you want to speculate on this outcome levered bets on radical dollar appreciation look like one of the best choices out there, followed closely by bearish levered bets on commodities.  I would not consider such a speculative play that is not characterized by defined risk, as this analysis is based on nothing more than observation of behavior by market participants that all point toward their foreknowledge of an event that might happen in the reasonably-near future and is not, at present, backed up with actual significant credit-spread widening or other objective criteria.

Disclosure: Initiated a small speculative, defined-risk play LONG the US Dollar (UUP CALL options for March 2010)

The last time Denninger smelled something fishy in credit markets was September 24, 2008 and advised his readership. The markets subsequently freefalled into the November 2008 lows.

Bob Hoye, of Institutional Advisors, in an October 23, 2009 interview with HoweStreet.com,

We also have now, the opposite [of the Euro Index] on the US dollar index, which is the sequential buy.

This is going to change the platform of speculation which has been massive speculation against the dollar and long anything that was moving. So, we think there’s going to be a huge rearrangement.

We’re looking for weaker stock markets into maybe the end of the year, early January.

Marc Faber, publisher of the Gloom Boom & Doom Report, in a September 3 interview, turned short-term bullish on the dollar as well.

I wouldn’t be surprised if the Dollar would for a change strengthen and equity markets would correct and possibly quite meaningfully so.

Faber gave a window in the range of about three months for a dollar rally to occur. In his October 2009 GBD report, however, he suggests that any recovery in the dollar will be shortlived, so investors should be forewarned.

I should add that the Fed won’t increase short-term interest rates to protect the value of the US dollar given the high level of unemployment and slick in the economy. So, aside from brief recovery phases, we should assume that the US dollar will continue to lose its purchasing power over the next five to ten years, and probably at an accelerating rate. Other currencies are likely to be in the same boat and will also lose some of their purchasing power.

As was discussed in CAUTION: Crash/Collapse Dead Ahead Say Faber, Rogers, Dent and Celente, the contrarians continue to look for a correction/collapse in US and global stock markets, likely resulting for strengthening of the US Dollar. This may affect all asset classes, especially stocks, commodities and precious metals.

One caveat regarding precious metals, is that it is difficult to say if gold and silver have decoupled from the broader stock markets and commodities. As of this moment, it looks like gold is benefiting from a falling dollar, though gold is also edging up in terms of other currencies like the Euro and Yen, as well as a basket of currencies as define by the Kitco Gold Index. So, while the dollar;s weakness has something to do with the rise in gold, it is quite possible that what we are seeing is gold becoming the safe haven asset of choice for investors globally, regardless of what the US Dollar is doing.

As was suggested by David McAlvany in his October 21, 2009 Weekly Commentary, while we may see gold decline initially with a broader stock market down move, it is possible that gold will not fall as fast, and may actually entice buying at lower prices.

Mac Slavo Disclosure: Short S&P 500, Long Gold