From the Desk of Ian Culley @IanCulley
Perhaps you’ve noticed that I don’t use moving averages.
For starters, I don’t like the way they look.
They muddy the pristine waters of price. And if I can't pick up on the underlying trend by looking at price action, then god help me.
Regardless, I do my best to stay open-minded. Everyone has their own process. Mine works for me, but that doesn’t make it superior by any stretch.
So, when Grant @GrantHawkridge dropped a US Dollar Index $DXY moving average crossover study in our analyst Slack chat last weekend, I couldn’t resist.
It wasn’t because it highlighted the “death cross” (when a 50-day moving average falls below a longer-term 200-day average), which always stirs a great deal of excitement.
Nor was it what his study suggests for the dollar in the coming weeks and quarters.
Rather, it’s what it implies for US stocks.
Check out the chart of the DXY with a 50-day (blue line) and a 200-day simple moving average (red line):
There are three instances of the 50-day crossing below the 200-day over the past five years.
Aside from last week’s crossover, the May 2017 and July 2020 events were great times to short the dollar and – more importantly – buy stocks.
Who knows how the current signal will play out in the coming weeks and quarters.
I don’t use moving-average crossovers as trading signals. Instead, it’s more about confirming a change in trend.
Check out the plentiful death cross signals for the dollar since the early 1980s:
Besides the string of false signals heading into the 1985 peak, this moving-average crossover tends to precede periods of US dollar weakness.
And there would have been plenty of trading opportunities for the longer-term investor.
That’s great.
But are we really interested in what the dollar does here? Or are we more concerned with how risk assets will be affected?
I’m guessing it’s the latter.
Luckily, the numerous signals provide a healthy sample size (n=28) to measure forward returns.
Here’s a table of returns for the S&P 500 following a death cross in the DXY:
Five, 10, and even 63 days out from a crossover signal, the S&P 500 historically provides mixed returns with positive gains occurring 57.14%, 51.85%, and 66.67% of the time, respectively.
But when we move further out on the time horizon to 126 trading days (six months) and 252 days (one year), the returns are quite impressive at 85.19% for both.
Again, I don’t consider this a trading signal.
Rather, it highlights a bullish environment for stocks following a significant bullish-to-bearish trend reversal in the US dollar.
We’ve seen it many times before!
If you walk away with anything from this study, remember this: We are in an environment that favors looking for stocks to buy, not sell.
I know you’ve heard us say it before. The thousands of charts we flip through every week have been telling us this for months.
And, as the bottoming process unfolds, further evidence stacks in favor of our bullish outlook.
The death cross in the US Dollar Index is just the latest sign.
So, what do you think?
Are you looking for stocks to buy? If so, which ones?
And if you’re not buying stocks, why not?
Let us know. We love hearing from you!
Thanks for reading.
And be sure to download this week’s Currency Report!
