Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Dollar Index the Key to Financial Market Dynamics

Currencies / US Dollar Aug 10, 2009 - 11:34 AM GMT

By: Guy_Lerner

Currencies

Best Financial Markets Analysis ArticleOver the next couple of weeks, I will attempt to put together an asset class road map that should help navigate the weeks and months ahead. In a nutshell, I would have to state that I like commodities over long term Treasury yields and equities, and the key driver will be the falling US Dollar Index.


Ever since I wrote the article "Very Dangerous Time For Dollar Index" on June 19, 2009, I have gotten several questions from readers about how I could be bearish on equities while maintaining bearishness on the Dollar. It seems to be a given that Dollar devaluation only leads to higher stock prices. While currency devaluation does lead to asset inflation, this can be too much of a good thing as inflationary pressures (real or perceived) will eventually begin to become a headwind for higher equity prices.

And this is what we saw in late June and early July, 2009. Inflationary pressures as measured by trends in commodities, gold, and yields on the 10 year Treasury bond remained strong and the market almost rolled over. Once these trends lost momentum, stocks reversed strongly to the upside over the past month. This pattern was pretty much repeated over and over again in the prior bull market for equities.

But I am ahead of myself. So let's first look at weekly chart of the Dollar Index (black line) versus S&P500 (blue line). See figure 1. For much of the late 1990's, stocks and the Dollar Index traveled together. These where the days when a strong Dollar and a strong economy and a strong stock market went hand and hand. This was prior to point 1 on the chart. At point 1, the historic multi-decade bull run for equities was over, and several years later at point 2 the US Dollar Index topped out as well. Both asset classes fell together and then equities bottomed at point 3. The Dollar Index continued lower for another 2 years finding a bottom at point 4. From the bottom in equities at point 3 in October, 2002 to the bottom in the Dollar at point 3 in December, 2004, the S&P500 gained 50%!!

Figure 1. Dollar v. S&P500/ weekly

After a wide trading range with an upward bias (for over a year), US equities sprinted higher starting in November, 2005. This is at point 5, and it also marked the highs for the US Dollar, which went on a downward path for over 2 years. In October, 2007 at point 6, the S&P500 topped out, and within 6 months the US Dollar Index found a bottom at point 7. At point 8, the Dollar Index peaked, and lo and behold, the equity markets found their footing putting in the March, 2009 bottom.

Since 2000, the movements in the US equity markets can be explained (for the most part) by the movements in the US Dollar. A weaker Dollar has been kind to equities even if the fundamental foundation for such a relationship is wrong on two accounts. One, no country has ever devalued its way to prosperity. Two, the foundation for such asset growth -too much money chasing too few assets - is not sound. It leads to economic and financial instability once these excesses are unwound. This is not organic growth, and it provides a false sense of prosperity. But enough of the moral ground.

So let's get back to the Dollar Index. In the June 19 article, I presented a very simple trading system, which warned that the Dollar had a high likelihood of unraveling. See figure 2 a weekly chart of the US Dollar Index (symbol: $DXY). The premise of the strategy was this: 1) short the Dollar Index on a weekly close below 3 pivot low points; and 2) cover the position on a weekly close greater than the 40 week moving average. There were no other filters involved in this strategy. The strategy triggered a signal to short the Dollar 2 weeks ago.

Figure 2. Dollar Index/ weekly

Such a strategy produced 19 trades since 1975. There were 42% winners; no single trade lost more than 5%; 5 of the trades had gains greater than 14%. These parameters - lots of small losers with several big winners - are consistent with a trend following strategy.

To look at each trade, I introduced a concept called Maximum Favorable Excursion or MFE. MFE measures in percentage terms how far a trade can go in your favor before it is closed out for a loss or a win. For example, look at the MFE graph from our "close below 3 pivot points strategy" in the Dollar Index. Remember we are shorting the Dollar Index here. See figure 3. The green caret within the blue box represents one trade. This trade ran up about 9% (x-axis) and was closed out for a 2% gain (y-axis). We know this trade was a winner because it is a green caret.

Figure 3. MFE

Looking at the graph, we see that 5 of the 14 short trades ran up greater than 14% before being closed out; these are the carets to the right of the blue vertical line. So think about that for a second. You short the Dollar Index based upon this pattern, and you have a 26% chance (5/19) of seeing prices fall significantly.

Taking it one step further, we see that 13 out of the 19 trades had an MFE greater than 5%; this is to the right of the red line. In other words, if there is a close below the 3 pivots, then there is an 68% chance (13/19) that the Dollar Index should fall at least 5%.

So when I state that the Dollar Index (symbol: $DXY) has a very high likelihood of embarking on a major down swing in the coming weeks I am basing this comment on these observations. But here is the real kicker in all this: 1) the average of all trades from this strategy lasts 37 weeks; 2) a losing trade will last on average 17 weeks; 3) a winning trade will last on average 65 weeks. We are only two weeks from the current sell signal.

So think about this for a minute: if the Dollar continues in a down trend, there is a high likelihood of large losses and these losses should occur over the next year. This will likely keep a bid under equities for longer than most of us are expecting. Commodities will also be strong and should outperform equities. Let's add a third symbol to figure 1, and this is the CRB Futures Index (gold line). What we see and what we know is that in a falling Dollar environment, commodities will outperform. See figure 4. Equities will be hampered by real or perceived inflationary pressures as trends in commodities and long term Treasury yields rise. Equities will move higher in a falling Dollar environment, but their ascent should be a lot choppier. Furthermore, without real organic growth -marked by job creation and wage inflation and consumer spending outside of government subsidies- any economic recovery will always be questioned for its sustainability.

Figure 4. Commodity v. S&P500 v. Dollar Index

For now, the falling Dollar is the key asset class that is driving gains in commodities and equities. A lower Dollar will also benefit longer term Treasury yields. Over the next couple of weeks, I will update my thoughts on commodities and gold and long term Treasury yields. And I need to provide you with the information as to why equities will under perform commodities.

    By Guy Lerner

    http://thetechnicaltakedotcom.blogspot.com/

    Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

    © 2009 Copyright Guy Lerner - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Guy Lerner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in