Dolla Dolla Bill Y’all

To quote the legendary Staten Island based philosophers, “Dolla Dolla Bill Y’all” indeed. This statement could not be more relevant than right now. Want to know where commodities are headed, and therefore emerging markets, and probably stocks as an asset class? Look no further than the US Dollar bill.

Here’s what I see. Commodities and US Dollars have some of the most consistent and reliable negative correlations in the intermarket world. The chart below shows how strong this trend has been for a while, during both bull and bear markets for stocks. The correlations between the US Dollar Index and CRB Index have been extremely negative, there’s no denying it:

8-29-13 usd vs crb

So where are commodities headed? Well if August marked the bottom for dollars, I would say commodities are heading much lower. And if that’s the case, I would imagine that Emerging markets follow. Go run the numbers and you’ll find very high positive correlations between both assets. And if EM continues to get crushed, will US stocks be able to ignore that? Doubt it.

I think Dollars are the key here guys. This is a weekly chart of the US Dollar Index going back a few years. We’re right back down to this key uptrend line. I would say that a break below that trendline support (80.60-ish) and all bets are off on this dollar. That change of events would be bullish for commodities and emerging markets. And I have to believe US Stocks would benefit from that.

8-29-13 dx

But the trend right now is pointing towards higher US Dollar prices. So that’s the direction in which we’re leaning.