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Maestro (U.S. Dollar) sets the stage

|Includes: Invesco DB USD Bull ETF (UUP)

The U.S. Dollar (NYSE:UUP) has really been the catalyst for the major moves in the stock market.  In March 2009 when the stock market was crashing the U.S. Dollar rallied to its 2006 high. Since that point the dollar went into a virtual free fall. The high print in March 2009 for the U.S. Dollar was 89.62. At this time the SPX (NYSE:SPY) hit a low of 666.79 as fear was running wild across Wall Street. In November 2009 the U.S. Dollar traded as low as 74.20. This is a over a 15 point decline, or about 17.2 percent.

As we all know the stock market staged one of it's biggest rallies in market history in 2009. All of the major indexes bounced higher by more than 50 percent off the lows and the tech heavy NASDAQ Composite (NASDAQ:QQQQ) even bounced over 80 percent off it's March 2009 lows. The catalyst was obviously the weak U.S. Dollar.

If anyone watches the dollar intra-day they will notice that when the dollar declines the market bounces or rallies. Often on any down tick in the dollar commodities will instantly bounce or trade directly inverse to the dollar. However, when the dollar rises or trades higher commodities usually pause intra-day or slowly decline before dropping sharply. It usually takes a strong move in the dollar to push commodities down sharply.

Lets use today as an example. The U.S. Dollar index was gapped lower to start the day. The futures and most every commodity related stock was gapped higher to begin the trading day. Since that time the dollar has traded higher from it's gap down low open and commodity stocks have pulled back slightly off their intra-day highs. Therefore, it takes constant upside in the dollar to knock or keep these inflationary stocks down. Some of these inflationary and commodity stocks that are trading higher today on the back of the weak dollar are Exxon Mobil (NYSE:XOM), U.S. Oil Fund (NYSE:USO), SPDR Gold Shares (NYSE:GLD), and Ishares Silver Trust (NYSE:SLV) just to name a few.

Remember almost every trade is a dollar trade. When the dollar is falling or declining watch the commodity and inflationary stocks as they are likely to trade higher. When the dollar is strong watch for pressure on the commodity and inflationary stocks.

Nicholas Santiago,
Chief Market Strategist