Last week it was "likely" over. [4] This week, I am going to say that the bull trend in the Dollar is "definitely" over. I am basing this observation on the fact that we are starting to see a clustering of negative divergence price bars. This doesn't necessarily mean a top and a reversal, but it most definitely means a significant slowing in price momentum.
Figure 1. Dollar Index/ weekly
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Ok, this is all well and good, but what could this mean for equities? Great question. The Dollar model turned bullish on September 30 and since that time the SP500 has gained about 16%. If you would have asked me how stocks were going to perform in the face of a rising Dollar, I would have said very poorly as the pattern over the past decade has been strong Dollar and weak equities. This did not play out this time as the both the Dollar and US equities benefited from European weakness. Money flowed to our shores because we were the safe haven of choice. At least this is what investors want to believe.
All of a sudden a strong Dollar is good for US equities and a sign that capital is flowing to our shores. So what will happen if we get a weaker Dollar? At first blush, I would think that this would be equity positive, but if we are in a new dynamic of money flowing to the US because we are the safe haven, then we should see lower equity prices as the Dollar drifts lower. And in some respect, this may actually make sense especially since the equity markets are at the upper end of their very long term trading ranges. A weaker Dollar along with weaker equity prices may be the new dynamic. Once again, I would defer to the price action as this is the only reliable metric in a world of distorted markets. The breakouts that are occurring - like in the PowerShares QQQ Trust Series (symbol: QQQ) [6] -- need to hold above support levels.
In summary, the bullish trend in the Dollar is over, and we need to monitor how this might effect equities moving forward. Just as investors get comfortable with one thing, the market has a way of serving up a curve ball.
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