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What The Dollar's Recent Upturn Means for Stocks, Commodities, and Everything Else

|Includes:CRB, EUO, GLD, QQQ, ProShares UltraShort S&P 500 ETF (SDS), SLV, SPY, TBT, TLAB, UUP

Since it feels like we may be at a major turning point in the markets, I thought it'd be useful to review our current outlook with regards to the various key markets.  As always, please take these musings with a grain of salt - I'm just an armchair trader and blogger, after all!

The Dollar

It sure feels like the dollar is ready to explode up once again.  We got our standard fare retracement after the last rally, which turned traders from very bullish to very bearish.  And now, a sharp surge over the past two weeks has the buck looking like it may have put in a significant bottom:

Dollar Price Chart and Outlook August 2010Source: StockCharts.com

As mentioned many times, we think the Dollar is THE key to all the markets.  If this dollar rally is for real, then that would certainly look bearish for...

Stocks

We've got a couple of strikes against the bull being back on Wall Street:

While a surge to new highs on strong volume could negate the bearish cases, the risk/reward from here looks to be heavily weighted to the downside.  And if stocks are falling, so should...

The Euro and Most Commodities

The Euro has traded exactly opposite the Dollar.  So you'd expect a Dollar rally to roughly coincide with a Euro/Stock/Commodity decline.

Euro Price Chart August 2010The Euro's price action has been an exact opposite image of the Dollar.

In the commodity sector, energy and the industrials would probably take the worst licking.  Agriculture normally would be OK, but it does look like prices in wheat and other grains have gotten ahead of the underlying fundamentals.

Commodity CRB Index Price Chart August 2010I love commodities as much as anyone...but it looks like it'll be awhile before these glory days are recaptured.  Still wayyyyyy off those 2008 highs!

Gold

I think I'm going to give up on predicting what gold will do.  Though (maybe I can't help myself) - if you forced me to pick, I'd say it's heading down before it heads up, due to the pervasive bullishness in favor of the yellow relic.

Gold Price Chart August 2010Gold's price action...I got no clue.

But I've been wrong on gold to date, so I can't claim to have much of a clue here. 

Bonds

On the surface, you'd expect bonds (at least US Treasuries) to rally in tandem with a declining stock market as a "flight to safety" play.  That was the script in 2008.

However there is extreme bullishness about bonds right now - so I'd leave room for a near term decline.  Future bond prices and rates are a tough, if not impossible, forecast to make.  After all, how many people (myself included) have gotten creamed in the "one-way" trade of betting on the inevitability of rising interest rates? So I think I'll stay away from this market, too.

30 Year Bond Prices  20August10Bonds have rallied like hell since April.  But is this trade getting too crowded?

Summing Up The Markets

Bottom line - watch the dollar. If it rallies like we think it will, then I'd expect to see another bout of "Dollar Up, Most Everything Else Down".  I wouldn't want to try to pick a winner if this happens - we saw what happened from Oct '07 until March '09, when there was nowhere to run, and nowhere to hide.

Note: All charts courtesy of StockCharts.com

Also see: With all this government debt, why aren't long-term interest rates skyrocketing? 

Disclosure: Long UUP, and short the S&P 500 via futures and SDS
Stocks: SDS, UUP, TBT, QQQ, SPY, EUO, GLD, SLV, CRB, TLAB