Ignore Everything But The Dollar

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Includes: UDN, UUP
by: Kevin McElroy

You wouldn't know it from watching the news or reading the paper - but there's only one data point that deserves your attention. It's not the presidential elections next year, it's not sovereign debt issues in Europe or civil war in Syria. Forget the news cycle! Use your TV like I do, to watch Netflix (NASDAQ:NFLX) DVDs. Because the only piece of news that matters for you as an investor is the movement of the U.S. Federal Reserve note.

How important is the dollar? I think this simple chart tells the tale:

US Dollar

This chart plots the S&P 500 against the dollar index (which measures the dollar's strength against a basket of other world currencies). It's a pretty strong inverse correlation between the dollar and stocks. When the dollar falls, stocks get more expensive and vice-versa.

This chart shows how the dollar can act as a tsunami to overwhelm even the staunchest fundamentals. Stocks seem to be at the complete mercy of their unit of account - which tells you something. It tells you that we're not in the kind of investment climate where you can simply do your homework and come out on top. You might still come out ahead of other investors, but the dollar tsunami will crush you if you ignore it.

So the question is: where's the dollar headed next? If it rallies, remember, stocks are likely to fall. If it falls, I think stocks (and most other assets including gold and oil) will rally. And right now, the dollar is butting up against strong overhead resistance:

US Dollar Cash Settle

My suggestion: look for the dollar index to break overhead resistance above 79. If that it breaks above that point, we're likely to see another dollar rally - and potentially very large one. Such a rally would obliterate stocks, and probably give us some attractive entry points on gold and silver too. However, if the index FAILS to breach 79 in the next week or so, I think we'll see another stock market and commodity rally for the next couple months, culminating in the dollar bouncing off of the 74 level at the lower end.

Keep an eye on the index. Invest accordingly.