From the Desk of Ian Culley @IanCulley
Did we just experience the largest bear market rally in history?
Or did the June low mark the bottom for stocks?
Instead of getting caught up in the “bull vs. bear” debate or, even worse, attempting to pick the bottom, let’s focus on a singular fact…
US dollar headwinds persist. And whether it was the bottom or not, as long as this is the case, stocks are likely to remain under pressure.
The triple-pane chart below includes the US Dollar Index $DXY, our G-10 currency index, and the US dollar advance-decline line:
All three lines are moving from the lower left to the upper right. And all three lines are printing fresh highs. Not much to uncover here, just unabated US dollar strength.
If we think back to the past month or so, we shouldn’t find these new highs surprising.
Every trade aimed at fading the dollar quickly failed. Buying the bounce in the pound was a bust. And it turned out that there was only one side of the Swiss franc worth playing – the short side.
We’re now short both.
Of course, there’s the euro – a picture-perfect downtrend that demands we stay short.
The Chinese yuan also continues to fall. And our bet on a weaker Korean won is ripping toward our secondary objective.
The list goes on…
But what about those potential failed breakouts in the USD/SEK and the USD/THB?
Well, they look more like false starts with the USD/THB back above its 2008 highs. What we noted in early August stands:
If the USD/THB is back above its 2008 highs, I have a hard time believing financials $XLF and home construction $ITB are holding above similar levels… Instead, these crucial areas of the stock market are most likely falling back below their pre-Global Financial Crisis highs.
That’s what it’s all about! Stocks are not going to rally in the face of a rising dollar. Period.
The currency markets have made their move, and the US dollar is in control. When it comes to stocks, our best bet is to focus on potential areas of support and remain flexible.
Stay tuned!
Thanks for reading.
As always, let us know what you think.
And be sure to download this week’s Currency Report!
Premium Members can log in to access our Weekly Currency Report. Please login or start your risk-free 30-day trial today.
Click here for our Weekly Currency Report.
Allstarcharts Team