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How the U.S. dollar wrecking ball can knock stocks down another 10-15%

Yahoo Finance’s Jared Blikre is joined by StockCharts Chief Market Strategist, David Keller, as they discuss the Stock Bear Market, time and risk management, and Keller’s journey in finance, and the future of market buying opportunities.

Video Transcript

- I've described the US dollar as the wrecking ball for risk assets. And someone was talking about, is anything going up right now? And the answer is, yeah, there's a couple things. Interest rates, but then the dollar. And the dollar has just been this incredible, beautiful uptrend. I mean, consistent push higher through the course of 2022, and really started last year. As long as the dollar continues to move higher at the pace that it is, again, it's hard to imagine the commodities can mount any sort of significant improvement, that cryptocurrencies could thrive.

Gold prices. I mean, if you told me before 2022 inflation is going to be, in many ways, the story, I would immediately think, buy gold. Because that's sort of the traditional playbook. That's the classic inflation hedge. Talk about one of the worst trades into 2022 has been gold. I mean, it just has not been able to do anything. And the reason is because, same thing. It's denominated in dollars.

So the US dollar index is actually overbought right now. And it's actually even more than that. It's what we call extremely overbought. And what that means is when you measure price momentum, it's a way of-- it's kind of a z-score if you know statistics. You're kind of standardizing the movements in a data series and trying to find extremes.

The US dollar has been overbought for much of 2022, particularly on the moves higher, which basically means there's extreme upside momentum. When you become extremely overbought, which is where we're at right now, and if you use the RSI indicator, it's an RSI above 80. We would always call that the good overbought. That means that it's gone so strongly to the upside, there's probably at least one more move higher.

So it's sort of a short term pullback, long term still probably higher kind of thesis for the dollar. And again, that's one of those other things. You ask me how the S&P could continue to deteriorate and go down to 3,500, 3,200, which I think is an ultimate downside target for me. It's the dollar remaining strong that allows that most likely to happen.