Breakout

Dollar Decline Is Propping Up Stocks

Jeff Macke
Breakout

After a vacation-driven hiatus Dos Hombres is back with our specialized blend of Matt Nesto's well-researched observations and my general outrage.

Nesto led off by celebrating the one month anniversary of the stock market's most recent rally. Singing and Cake? No way, baby. Nesto partied data-style!

Over the last 30 days the S&P500 is up a robust 5%, led by commodity makers like Exxon Mobil (XOM) (+10%) and Halliburton (HAL) (+21%). Following the money, my trained journalist friend went to the commodities themselves. Score one for deductive reasoning: the commodities themselves have been strong almost across the board. My precious Gold (I'm long the (GLD) ETF) is up 7%, crude +9%, silver +16% and rough rice up a stunning 27%.

As for specific companies some of the leaders were Wynn Resorts (WYNN) up 24%, and natural gas concern EQT Corp. (EQT) gaining 27%. One of the best movers of the month was Google (GOOG), screaming 30% higher on strong earnings and, um, a rather bleak quarter and outlook from one of Google's competitors which shall remain nameless.

All of this stock strength in the face of the ongoing U.S. debt-ceiling debacle begs the question, "What on Earth is holding these stocks up?" Sophisticates and academics will offer you fancy-pants answers of all sorts to explain how we can have both a crisis and a stock rally at once. The answer is a decline in the U.S. Dollar, particularly versus the Euro.

Breakout first brought the "Dollar down, stocks up" relationship to viewers' attention about three months ago. We've beaten the point to death, paying particular attention to 1.40, the point at which each Euro costs $1.40. The Eur/Dollar 1.40 level held repeatedly in June much the way the market held S&P 1,250. As the currency war between Greek debt and U.S. default for the title "Worlds Biggest Fiasco" picked up pace in July, the dollar looked relatively appealing. It was a bullish buck view rather aggressively reversed when European officials cobbled together a suspiciously pointless bailout plan while Washington continued to dicker.

Is the relationship between a weak dollar and strong stocks perfect? Obviously not but neither are any relationships. Is boiling down the intricate interactions between global financial markets to the price of Euros in terms of dollars a grotesque over simplification? Yes and very much intentionally so. The best ideas can always be explained in short form.

Regardless of the obvious criticisms, "Dollar Down/ Stocks and Commodities Up" is logical, intuitive, and working. This isn't a trading strategy per se, the relationship is neither one-for-one nor day-to-day. But the cost of a Euro in dollar terms is moving with the trend of stocks. All other things never remain equal but a weak dollar is bullish for stocks. Near as I can tell it's the only thing bullish for stocks lately. As trading theories its the best we got at the moment so I'm running with it.

Got a better idea? Bring it on in the comment section below.

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