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Stock Sell-Off: It’s the Dollar Again, Dummy!: Macke

Jeff Macke
Breakout

Markets are selling off at an accelerating pace. The catalyst for the drop is being attributed to one-off headwinds, summer lethargy or a soft patch which is setting the stage for an autumn rally. The degree to which I disagree with all of the prior theories is hard to convey without using swear words.

It's the dollar, dummy. Again!

As I said a month or so back, it's the strength of the U.S. dollar causing selling in commodities and stocks. The dollar has been the ugly stepchild of global currency for a long time. This was by U.S. government design. Ironically, it's too much dollar strength we really have to worry about now.

Currencies trade more slowly than other markets, especially commodities. A 1 percent rise in the dollar puts more than 1 percent pressure on commodities and stocks. Small currency moves result in large moves in other markets.

The dollar is now moving higher against the euro. The dollar hasn't "broken out" versus the euro and stocks haven't "broken down" below support. But a rising dollar and falling stocks are looking more likely every day, and it's putting pressure on assets across the board. Crude is down today despite OPEC's apparent determination to limit supply. Commodities are down virtually across the board, with gold (a currency hiding place) strong on a relative basis. Cyclical stocks (reliant on a weak dollar and global growth) are being beaten senseless.

Dollar up, stocks down. I'm not saying "I told you so." But I said it in early May on Breakout, and I'm telling you again now in real-time when it's useful insight: U.S. Dollar strength is very bad for stocks. Stocks will not rally unless or until it takes more than $1.50 to buy a euro. It takes about $1.44 to buy a euro right now, roughly 1% less than it took yesterday. If we get to the $1.30's, stocks will be much lower.

What am I doing about it? Selling stock rallies, keeping the euro/dollar relationship at the top of my quotes and putting off buying tickets to Europe for a trip next winter. Yes, I really am doing all three of those things and have been doing so rather publicly for a long time now.

Think I'm too extreme? There are smart guys like the absolutely must-read Dennis Gartman who are on my side. More "colorful" folks such as the literally irrepressible Don Harrold are watching this as well. If you think I'm emphatic on the implications of a stronger greenback, take a listen to Mr. Harrold in the clip above.

Disagree? Bring it on. Comment below or drop us an email at BreakoutCrew@yahoo.com.

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