Oct
21

Weak Dollar = Stock Market Liability?

UUP

Everyone has been used to the correlation of a weak dollar equaling higher stock prices. But, I can tell you on a factual basis that at some point the dollar’s decline will become a liability for the market and that the correlation will reverse. Sure, the declining dollar is good to a certain degree because it inflates asset prices (e.g, stocks) and makes US exports cheaper (bravo to CAT). But at some point, the price instability (as well as inflated oil prices) will outweigh the positive effects the market is currently embracing.

 

I have no idea when this will occur. However, you can see on the dollar chart that UUP is on its way to support at $22. I think the best case for the stock market is a 3-6 month consolidation like we had in 2008. I think the market could move higher so long as the dollar is stable.

If the dollar bounces hard from support, I think the most likely scenario is lower stock prices. I think the existing correlation will hold up. However, if the dollar breaks support I will not be surprised if this freaks the market out and surprises a lot of folks that have grown used to a weak dollar equaling a rising stock market.

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  • tony61
    At some point the dollar will need to be defended if an external event does not act as a catalyst. I'm not sure what this will be, but this seems to be a supersaturated broth waiting for the crystal to be dropped that will send stock lower and the dollar higher.
  • I would be shocked if UUP doesn't hold $22 for a while. I think there are 3 possible scenarios.

    1. Bounce off of $22 and a leg higher.
    2. Consolidation zone around $22 that goes for a period of months.
    3. A multiweek consolidation zone and a leg lower.
  • neoken
    Hi C&C, one suggestion... can you make your charts bigger when clicked into (like your old blog)? It's kinda hard to see your annotations and such. Thanks!
  • Let me see what I can do. I'm not sure why it is sizing it so small. I can't read it either.



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  • redvetttes
    the way oil going is will be $4.00 at the pump by Dec 1,We will have a good xmas season,Did you hear that 1 out of 5 are unemployed in California
  • Guest
    I am NOT FOOLED by today's little end of the day panic caused by Dick Bove. I think the end of today was a great buying opportunity.
  • Until the trend of the dollar declining is broken (and support is coming so it is possible as I mention), it is not safe to short the market. That is my indicator.
  • tony61
    What level on the UUP or DXY are you looking for to signal a reversal in the dollar?
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