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Asset performances since July 22nd haven’t been pretty for anything except the USD and bonds. With the end of QE2, and the lack of other devaluating policies, stocks and commodities are getting pummeled. Furthermore, with the reliance that many companies have on global sales, a stronger dollar means a lower bottom line.

A Brief History: After the August FOMC minutes, investors were disappointed, but still fairly certain of a strong monetary policy upcoming in September. Commodities and stocks had decent gains over the past month in anticipation of further easing, only to be disappointed with a relatively weak policy out of the Fed on September 21st.

Interestingly, both gold and silver managed to hold most of their value despite an overall market selloff after missed expectations. On September 21st, gold and silver each finished with less than a 2% loss while the indices all finished over 2%.

The following two days told a different story. The overall market was still hurting, but gold and silver took the brunt of the punishment. Some people argued that this was due to a leaked CME margin hike, but if you take a look at this article, you’ll see that no margin hike has ever had this kind of impact on silver or gold. Also, if you look at commodities as a whole, they are all getting smashed pretty hard (click to enlarge images):

Commodity Comparison

NOTE: The starting value of the graph is the opening price on July 22nd.

Selloff Explained: The reason for this is most likely that the big money is selling their best performers, while holding on to stocks that took an unreasonable beating. Friday’s big selloff in commodities managed to keep stocks looking ok, but come Monday, something else will need to be the target in order to keep stocks from selling off more than they already have. At the rate that commodities are reaching parity with stocks, they will quickly become not an option.

Until any policy comes out that devalues the dollar, we will be looking at continued deflation, lower commodity prices, and reduced earnings from any companies that have a large portion of their income derived from sources outside the US. If you are skeptical that the strength of the dollar has any correlation with the market, you only need to check out this graph:

Index Comparison

NOTE: The starting value of the graph is the opening price on July 22nd.

In summary, until such time when either other currencies are strengthened or the dollar is devalued, defensive maneuvers will be the only way to survive further drops in the market.

So take a deep breath. It might be a while before we get more easing.

Source: Market Drowns Under A Stronger Dollar: Stay Defensive