Dollar Rally, Bearish For Equities?

Summary

• When equities crashed in March, so too did other assets such as Crude Oil, Gold, and Silver. This drove the demand and price of the dollar $DXY through the roof.
• The Federal Reserve combated the liquidity crunch by injecting trillions into the markets. This sent the dollar down and equities up for the next 6 months.
• Keep an eye on the dollar if it attempts a rally, since that would be bearish for equities.

When the markets crashed in early-March, the dollar index shot up to levels never seen before in years. As investors rushed to cash-selling everything from equities to even Gold-the demand for the dollar shot up in reaction. This created a lack of liquidity within markets, which itself threatened the collapse of global credit markets.

In the midst of all of this, the Federal Reserve took decisive action in order to measure up the liquidity situation. Cutting interest rates in early March and introducing a plan to inject trillions into the system, the Fed successfully solved the liquidity crunch by flooding markets with trillions of fresh dollars through their bond buying program. This resulted in a top in the dollar index, and a bottom in the Stock Market, which has moved inversely to one another since late-March.

Notice the inverse correlation between DXY and SPX

Powell’s Fed-induced rally comes off the heels of a weaker dollar. A relief rally in the beaten down $DXY could spell further doom for the stock market, as it puts the Fed’s QE driven rally to the test. Keep an eye on the dollar within the coming days, since it alone can decide the fate of the market within the next few weeks. If the dollar continues to sell-off, then expect equities-especially $QQQ-to resume their recent rallies. If it stages a comeback, then expect the current correction in the stock market to continue down to it’s nearest support.