It was a busy week for stocks, but the most important price action was elsewhere.
The US Dollar is getting rocked as risk-on currencies catch big bids.
And it’s all happening at a critical level, that if violated, could mark a major shift in the intermarket landscape.
The one big question all investors should be asking themselves right now is simple…
“What is the best trade if this is a failed breakout in the dollar?”
In other words, what goes up the most if the dollar gets slammed back into the box?
Or even, what will be the best trends if the dollar heads back to the lower bounds of its range?
And I have some thoughts on this. I’ve been thinking about it for a long time.
I was expecting the dollar to become a tailwind last year. It didn’t happen. A falling dollar was the one thing missing during the post-election rally. But I think it’s coming now.
When I think about a weak dollar, I think about international equities. The most offensive areas of the global stock market should fare well with a falling dollar. Emerging Markets should perform particularly well.
Have you seen China? It’s already happening.
I think that is the top trade if DXY heads lower. It’s time to own ex-US stocks.
Another one is commodities and commodity stocks. Have a look at copper recently. How about the flag breakout in the Materials Sector SPDR (XLB) this week. It’s already happening.
And there’s one more theme I think too many people are missing right now. A lower dollar is probably happening in an environment where rates are falling too.
Banks, homebuilders, and the usual suspects should catch a bid. However, the biggest beneficiary of lower yields should be speculative growth stocks. And it’s already happening.
All the ARK Invest Indexes are trading at or near new cycle highs. ARKK, ARKF, and ARKW just broke out of multi-month continuation patterns. I think these indexes are going back to their prior-cycle highs.
And I think all these themes keep outperforming and posting big gains if this is a valid failed breakout in DXY.
We will re-evaluate when the time comes, but I think these trends have some real legs this time around.
Months from now we could be talking about the failed move that turned into a fast move for the US Dollar. Just imagine if a reaction leg sent DXY back to and through the lower bounds of its range.
That would mean a monster year for risk asset bulls.
