By Nicholas Santiago on February 16th, 2010 12:47pm Eastern Time
Every trader and investor is talking about a correction or a small pullback in the market. Since the January top in the major indexes the market have pulled back about 8 percent into the February 5th low. Now many traders and investors are saying the lows are in and the bull run from March 2009 is about to resume. While it is unknown who will be right or wrong one thing looks certain. The move of the market is directly inverse to the move in the U.S. Dollar.
The U.S. Dollar can be tracked or traded to the long side by using the popular Powershares DB US Dollar Index(NYSEUUP). For traders that are looking to track or play the decline of the the dollar can use the opposite ETF call the Powershares DB US Dollar Index Bearish(NYSE:UDN).
In late January we pointed out that the U.S. Dollar would hit a strong resistance level on the charts shortly. For those that happened to look at a UUP chart would have noticed that price traded into the weekly 50 moving average. After a long period of trading below this level the initial move into this strong moving average would be important and it has served as a wall of resistance for the dollar to climb.
While many traders and investors in the media will point out countless reasons and stories for the market to move in a particular direction it is really all about the dollar. When the dollar declines everything inflationary catches a bid. Just look at the rally in the market in March 2009. This bull run was on the back of the declining dollar plain and simple.
For example, one can look at the SPDR Gold Shares(NYSE:GLD) today and see that the GLD is trading higher by 2.40 to 109.45 as the dollar declines. The U.S. Oil Fund(NYSE:USO) is trading higher 1.38 to 37.69 as the dollar retreats. Cliffs Natural Resources Inc(NYSE:CLF) which produces iron ore is another commodity stock that is benefiting from the declining dollar. Everything that is commodity related is catching a strong bid on the falling dollar.
When the dollar declines watch the commodity and inflationary stocks. There is a good chance they will be moving higher when the dollar is declining. However, on the flip side when the dollar moves higher traders should beware that commodity and inflationary stocks will decline. Just look at the decline in the Market Vectors- Gold miners(NYSE:GDX) from early December into February 5th, 2010.This proves that the market depends on a declining dollar in order to move higher.
Comments