Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? (Part ii)

In this second part of our exploration of the recent US Dollar rally and what it may be reacting to in relation to the current US stock market highs and continued rally, we will explore some of the underlying factors that are translating into US Dollar strength while the US stock market continues to push higher.

In the first part of this research article, we highlighted the US Dollar reaction to the 2008-09 credit market crisis and how the US Dollar actually started to bottom/rally in early 2008 – just as the rollover top in the US stock markets continued to setup.  The way the US Dollar reacts to stress factors in the global markets is to strengthen as a safe haven as capital is constantly seeking the best environment for investment and profits.  When the markets enter a period of turmoil, the US Dollar typically begins to strengthen before the global markets really begin to react to the fear or turmoil.

The recent news of large financial institutions and hedge funds taking large losses and closing operations is somewhat similar to the Lehman event of 2008.  These types of larger corporate debt collapses have wide-range global market effects.  Sometimes, these events can ripple into other global corporations who engaged in this level of financing or credit functions.  For example, Credit Suisse’s attempt to recoup potential losses from the Greensill collapse may be a very complicated and fruitless process according to a recent Wall Street Journal article.

WEEKLY US DOLLAR SHOWS UPTREND STARTING

The current US Dollar Weekly chart, below, shows how the US Dollar has strengthened over the past 3 months and how this current uptrend aligns with the $89 lows from early 2018.  One of the most interesting aspects of this chart is the peak in early 2020, as the COVID-19 virus market collapse bottomed, which was followed by an extended decline.  As mentioned earlier, the US Dollar acts as a safe haven during times of uncertainty and chaos.  Obviously, the initial COVID-19 market selloff prompted quite a bit of uncertainty and chaos, prompting the US Dollar to rise nearly 9% in just two weeks.  Does the current upside trending in the US Dollar translate into more uncertainty and chaos in the markets?

The recent bottom on this Weekly US Dollar chart happened on January 6, 2021. This was the day that Congress certified the US state electors.  It was also the day that chaos took place in Washington DC.  From that point onward, the US Dollar began a decidedly upward price trend.  Since that low on January 6, the US Dollar has risen over 4.60%.  Over that same time, the SPY has rallied more than 7.5%, which obviously fails to show any US or global market concerns.

WEEKLY SMART CASH VS. US DOLLAR CORRELATIONS

The following chart shows the US Dollar (as a GOLD line) and our Custom Smart Cash Index (as a BLUE line) and highlights the threshold of the US Dollar that usually prompts a breakdown in price in the stock market.  The ORANGE threshold level on this chart for the US Dollar is 94.10 and the PURPLE threshold level on this chart 99.50.  Once the US Dollar reaches levels above the ORANGE threshold, the SPY becomes much more volatile and tends to retrace lower over time.  Once the US Dollar reaches above the PURPLE threshold, it appears the US Dollar reaches major resistance, stalls, and contracts, which prompts a fairly large upside price trend in the SPY.

Currently, the US Dollar Index is trading just above 93.00 and it just 1.1 away from the ORANGE threshold.  Should the US Dollar continue to rally over the next few weeks and months, our research suggests the US stock market will enter a period of increased volatility with broad sector trending/rotation.  As you can see on this chart, near the end of 2018, the US Dollar Index rallied above the ORANGE threshold while the Custom Smart Cash Index entered a period of extended price volatility (2019 through the COVID-19 bottom in 2020).  Once the US Dollar Index fell back below the ORANGE threshold (July/August 2020), the Custom Smart Cash Index began to rally estensively.

The current rally in the US stock market will likely continue until the US Dollar Index moves comfortably over the ORANGE threshold, there is a strong possibility the US stock market will enter a period of extended volatility and trending.  That means that the current bullish price trend may enter a broader rally phase – targeting a new excess phase peak.  Or, it may shift into more of a sideways price trend with a broad range of price rotation – like what happen in 2015 to 2016.

Interestingly enough, near the end of 2016, as the US stock market bottomed and began to rally, the sectors that lead that rally included precious metals, miners, utilities, regional banking, and technology (later in 2017).  This suggests we need to watch metals & miners as well as utilities and regional banking sectors later in 2021.

Currently, the leading sector trends are Real Estate, REITS, US Financials, Global Infrastructure, Global Natural Resources, Technology, Consumer Services, and Aerospace & Defense.  These leading sectors suggest many traders/investors believe the next few years will be filled with various advantages in technology, raw materials, consumer activities and infrastructure/defense spending.  Get ready for some really big trends in various sectors and be prepared to jump into some of these bigger trends.