#$uupt

This is something we need to talk about.

First, let me start by admitting that I don’t know what is going to happen tomorrow, next week, next month, or even later today. I have no idea what the price of anything is going to be in the future. And I’m okay with saying that because no one else does either, regardless of how enthusiastic they might seem about their “calls”.

With that said, what’s up with the United States Dollar? You guys know that I look at currencies and commodities and global indexes the same way I look at the S&P500 and $AAPL. To me it’s all just letters and math. No emotions with me. So yes, for years and years I’ve tracked the US Dollar and if/when I see something I’ll comment on it like I would any stock or US index. But whenever I’ve ever said anything about the Dollar, no one has cared. Literally, no one. I say one bad thing about Bank of America, however, and the hate mail comes flooding in. That’s just the way it is.

These days every email or phone call that I get from media outlets is about the US Dollar. I’ve never ever seen anything like this. We’ve gone from an asset no one cares about, because it’s not “sexy”, to everything that moves is because of the US Dollar. I’m amazed. I really am.

We all know that “news” follows price. That’s obvious. But this is now getting ridiculous. The US Dollar has gone parabolic. Fine. But now it has to be the topic of every conversation? Funny, last May when I loved the US Dollar no one cared. No one. Not a single person. Now? Everyone.

I’m not saying that we have to short the US Dollar today, or tomorrow or ever. But anecdotally I’ve never seen such consensus bullishness towards US Dollars. The actual data we look at suggests the exact same thing as we are at the most bullish sentiment levels on record while commercial hedgers, or the “smart money”, are hedging like if the Dollar is going to zero. Something’s up guys.

I was at a happy hour this week with some really smart guys. You know a lot of them, but I’m not going to mention any names. The Dollar was the topic of conversation….shocking I know.

Here’s what I think: Wisdomtree has made quite the name for itself by creating vehicles that investors can profit from a particular country’s increasing stock market prices, while at the same time providing a hedge against that nations deteriorating currency. Japan in 2013 and Europe more recently are good examples. The symbols are $DXJ and $HEDG which go long Japan & Europe respectively, while hedging against their falling currencies, Yen and Euro. These ETFs have both given investors incredible returns. They have done much much better than their Dollar denominated counterparts like $EWJ or $FEZ for example, which mirror similar indexes, but without the currency hedge.

I think the next one is the hedged United States ETF. People think I’m crazy. I probably am, but for other reasons. But this one is coming.

Just thinking out loud here, but I really do think this is going to be a big winner at some point in the near future. I hope Wisdomtree is listening. Give it the ticker symbol $SPXJ. I’m in.

Also see:

The US Dollar Just Hit An Important Upside Objective (3-11-15)

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Euro-in-the-wind image courtesy of Paul Rousso

Seasonally speaking, in the 16-year history of the euro, we see a tendency for the euro to head lower against the U.S. dollar on or about the eleventh trading day in March through the end of the month. Theory suggests this has worked in the past due to the fact that multinational conglomerate corporations based here in the United States repatriate funds before the end of the first quarter, and this has a tendency to depress prices in the first quarter. This trade has been successful 62.5% of the time since 1999, posting gains in ten of the last sixteen years.

With the euro under pressure from the new the accommodative policies of the European Central Bank, rates across the euro zone plunging, tensions among euro members, and lackluster growth across the region, seasonal forces may conspire with fundamentals and current events to push the euro even lower before month end. The strong dollar and weak euro may put pressure on US stocks as money flows toward cheaper international equities and the higher yield of US Treasuries.

With all of the hoopla surrounding the US Dollar these days, I think it’s important to address the fact that on Wednesday US Dollar Index Futures achieved a key upside objective based on its consolidation throughout January and February.

Here is a chart showing 2-hour candlesticks going back to mid-January. These intraday timeframes allow us to get a better idea of what is happening throughout the trading day, but the daily timeframe shows the same thing. On Wednesday the Dollar Index hit its 261.8% Fibonacci extension target of that consolidation:

Will that be the top? No one knows. But it is certainly an important level where I would be a seller. I have seen many tops and bottoms come from these levels. It’s hard for me to ignore this.

If that was it, I would imagine that the biggest beneficiary would be the Euro, who has been crashing throughout this entire US Dollar rally. Remember that the Euro represents close to 60% of the US Dollar Index.

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One of my favorite things about the market is watching sentiment shift from extreme bearish levels to extreme bullish levels after price has already made its big move. Market participants like to travel in packs and when those packs get to big, the unwinds can be spectacular. Most recently, this shift in sentiment can be seen in the US Dollar. They hated it in May, and after a monster rally, they now love them. Do you see how backwards that mentality is? So it’s up to us to take advantage of it.

Here we are looking at a weekly candlestick chart of the US Dollar Index. Since 2005 we have been in a symmetrical triangle well-defined by these two converging trendlines. After the epic rally since May, prices exceeded the upper of the two trendlines. But as you can see in this chart, it doesn’t seem to be holding:

Sentiment is such a powerful tool. Most members of the media caught on to this trend way too late, as usual. And with that tardiness, market participants have blindly followed along. This is why we focus on price and market behavior as opposed to “news” events. Here is the sentiment data for the US Dollar Index over the past year:

When price action and sentiment agree with one another, we generate great signals. We had a buy signal in May and have suggested selling the Dollar throughout the month of October (see here). At this point, it is really starting to look like a failed breakout. I am not interested in the reasons why, perhaps the fed, lower rates, stronger euro, whatever. Why isn’t our problem. We like to worry about the what and the when. And from where we sit today, it still looks like lower prices are coming for the Dollar Index.

From a risk management standpoint, we would really only want to be long the US Dollar Index above this downtrend from 2005. Below that and there is no reason to be involved with this thing, especially now that everyone loves it for some reason.

This is such an interesting market right now….

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Further shamed by the US dollar's recent advance, the Inflationistas - circa 2010, were paraded out on stage last week, shackled to their failed beliefs that the policy accommodations initiated during the financial crisis would rue the day. Considering the conceit for which many had expressed that opinion at the time and general reluctance to reflect on what went wrong today, it comes as no surprise that the Statler and Waldorf's of the world are now relishing a tender schadenfreude sirloin, that has been marinating slowly for years. 

Having said that - and picking up on the socionomic theme in our last note, the degree of confidence by the policy advocates today practically matches the swagger the Inflationistas embodied in the Spring of 2011. If the markets have taught us anything over the years is that those with the loudest cheers and sneers typically mark a turning point in correlation with those beliefs. The performance overlap with any given dogma - especially inflation expectations, cycles like the moon. Full, slowly transitions to crescent - and then back to new. Nevertheless, we remain on the dark side of the moon, in constellations such as precious metals and have watched the long victory trot enter what we suspect will be it's final turn. 

Echoing the inverse market psychology and pulling the disinflationary tide, has been the Herculean strength of the US dollar, that extended its record streak to 12 consecutive higher weekly closes - to the boisterous belly laughs of the policy wonks. Conspicuously, this show of strength has resurrected the mantle in the market and the media as - King Dollar, with the obvious understanding that it's dominance has only just begun. My have we come a long way from the new moon of the dollar cycle low in late April of 2011, where many of the same players and pundits openly declared the dollar crisis in full swing and just getting started. Back then, the mood in the markets were decisively dimmer, from both the usual suspects - to the ominous warnings from leaders in the private sector that the US consumer would soon face "serious" inflation in the months ahead. 

"Except for fuel costs, US consumers haven't seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory" - Bill Simon, then CEO of Walmart - Walmart CEO Bill Simon Expects Inflation - USA Today 4/1/2011

Very quietly the US Dollar Index has been hitting levels not seen in 10 months. For the first time I’m starting to see this development getting some of the attention it deserves. I think is now a good time to bring up this topic for a couple of different reasons. First of all, strictly from an educational perspective, it’s good to review the initial entry and risk/reward scenario that originally got our attention. Secondly, to address the more important, What do we do now? question.

Let’s discuss the initial entry point. I believe what we should really take away from this is the fact that the risk/reward was incredibly skewed in favor of the bulls back in early May. The fact that it worked isn’t the point. Because even if we were dead wrong on the trade, had it rolled over and stopped us out, the amount of risk being taken was a tiny tiny fraction of the upside implications had we been correct. The outcome is not the important piece here, it’s the process.

The detailed post from early May broke down the sentiment towards the US Dollar Index, historic resistance in the EUR/USD at the time, which represented about 60% of the Dollar Index and most importantly the failed breakdown below key support that couldn’t hold for more than a few hours. The idea was that we only wanted to own Dollars above that failed breakdown. Below that and all bets were off. But as we’ve seen time and time again, when everyone expects something to crash, in all likelihood it probably won’t. At the time, we were below 1.5 standard deviations below a 1 year rolling average of public opinion towards the dollar. In other words, extreme bearish levels. This isn’t the time we want to be shorting a name in that position, we’d prefer to be looking to buy it.

On May 8th, the Dollar Index broke below last October’s support on an intraday basis before reversing hard to the upside. I’ve seen intraday reversals like this turn into epic squeezes in the past, hence the title, “The Epic Squeeze Higher in US Dollar Just Began”. Meanwhile, the Euro which represents a huge portion of this index was simultaneously failing at a 6-year downtrend off all-time highs. In fact, the same day that the US Dollar made that intraday reversal higher, the EUR/USD put in an intraday downside reversal confirming a failed breakout. As usual, from false moves come fast ones in the opposite direction.

Again, I just want to reiterate that this has nothing to do with the fact that it worked. I think this is a similar pattern that we’ve seen before and one that we will see many times over. It’s the process that led us to this skewed risk/reward that I want to stress. I promise it will help us enter a position of another kind in the future. US Treasury Bonds coming into the new year is another good example of this sort of unwind.

So now what?

Okay great, the trade worked. But what do we do now as we run into all this resistance from last Fall. Also this area represents the 38.2% Fibonacci Retracement from the decline since last Summer. Realistically I would have to expect some sort of recognition of supply up here after such a huge move that occurred so quickly. Furthermore, the sentiment in the US Dollar Index has exploded higher now up above 65% bulls from down under 30% just a few months ago. Amazing how sentiment shifts so quickly after a rally like this. We’ve seen these sentiment unwinds in the past and I promise we will see them again. But right now, sentiment is no longer a reason to own Dollars. It’s not a reason to sell either, just not a reason to buy.

I’d let things chill out here for a bit. At this point, I would only feel comfortable owning Dollars above that former resistance. If and how this breakout occurs will tell us a lot about the Dollar’s strength. If we continue through this level barely addressing this former supply, I would take this as extremely bullish, but harder to trade. Truthfully I would love to see a nice tight consolidation up here for a week or two in order to set up another favorable risk/reward opportunity, especially as this trend is still higher. But the market rarely makes it that easy on us. In fact, Mr. Market usually tries to do the opposite and make it as hard on us as possible. Just the way it is.

However, I continue to believe the path of least resistance, from a more structural perspective, is still higher. But tactically, we want to be a little patient up here and respect that former supply. I’d be surprised if we didn’t head up and retest the highs from last Summer. But up here right this second, a little patience is probably the best approach. We’ll see.

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      Tags: $UUP $DX_F $EURUSD $FXE $USDU $UDN $UUPT $UDNT