The Stock Market Wrecking Ball

August 28, 2022

There's one major catalyst that can be a wrecking ball in a potential bull market for stocks.

What's going to stop a year-end rally?

I think if there's anything that can stop it, it's further strength in the US Dollar.

This summer, the markets have only reiterated the negative correlation between stocks and the US Dollar.

A little bit of dollar weakness over the past 6 weeks, or lack of progress to be more accurate, sparked a rally in stocks and crypto assets.

But as Dollar strength came back recently, the pressure on stocks and crypto has returned.

So let's take a closer look.

Here is the traditional Dollar Index (dominated by Euro), compared to an equally-weighted index of the other G-10 currencies, as well as an A-D line of the rest of the top 30 currencies in the world.

With the Euro breaking down to new multi-decade lows last week, you saw the US Dollar Index close at new 20-year highs.

But when you broaden it out to the rest of the G-10s, you're not seeing new highs in the US Dollar, yet.

And we also haven't seen the much broader A-D line hit new highs yet either.

The Brazilian Real just went out at new 10-week highs, for example. So something to watch for there, for sure.

For me, it's not about the Fed, or Earnings, Or Inflation, or European Electricity, or Biden or any of the stuff you see discussed on basic cable.

It's the US Dollar.

If you're betting on higher stock prices this Fall, then I believe you're making a bet on a weaker Dollar.

And vice versa. If you're in the camp that all this was the past couple of months was just a bear market rally, then you're looking for higher highs in the US Dollar.

That's it.

So what am I missing here?

Anything I left out?

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- JC