We've discussed this all year. What's the catalyst to send stocks and other risk assets ripping in the first half of the year?
It's the U.S. Dollar.
I continue to be impressed with just how resilient stocks have been, despite the Dollar's relentless bid over the past 4-5 months.
And now here we are, with so many people crying all weekend about something they call "tariffs", and they're slamming the Dollar.
It's all happening right at the 61.8% retracement of the entire '22-'23 decline. Do you think that's a coincidence?
I do not.
When it comes to the stock market, we always like to do a sum-of-the-parts analysis, whether it's the S&P500, or Dow Industrials or NYSE components. We call it market breadth.
We go through the exact same process in forex markets.
If you think that the US Dollar is going to fall, sending stocks and other risk assets souring, then you'll need to see a bid in other forex markets.
We can go one by one if you want. But I brought 2 important ones with me that I think are about to rip, confirming the US Dollar weakness.
Here's the Canadian Dollar breaking below former support, and quickly reversing all those losses. This is a classic reversal pattern. So if you're bearish the US Dollar (and bullish stocks), you're looking for upside follow through here in CAD:
Every time the Canadian Dollar has gotten down to these levels over the past decade, they've come in and bought them.
Is this time like those other times? I think it is.
And we're seeing something similar in Brazilian Real. You see that break below the Covid lows, and then a quick reversal?
From failed moves come fast moves in the opposite direction, is how I learned it. I think the BRL is set up to do exactly that.
How do you think risk assets are doing if the Brazilian Real is ripping this year?
I got a text message from Steve yesterday,
"Bro, Dollars getting slammed. What goes up the most if dollar gets wrecked?"
In this text he's asking me as a joke. Him and I both know that he very much knows the answer.
We've worked together every day for almost a decade, and he knows exactly what this means for the market.
I think it's impossible to have enough exposure to China right now. I absolutely love the setup over there.
Chinese equities have seen a relentless bid in the face of all this trade war news over the last few weeks.
A couple of months ago, we put a bullish bet on the iShares China Large-Cap ETF $FXI. Our calls more than doubled in value, allowing us to lock in gainsand ride the remainder risk-free.
Today we’re adding more long exposure, extending our time horizon, and giving this trade some extra time and space to play out.
While FXI has spent the past two months in a corrective phase, price is back at the upper bounds of this reversal pattern.
A breakout here will confirm a new uptrend is underway. I think it is coming any day now. Let’s get long more calls in anticipation of it.
A couple of weeks ago, Sam wrote about fertilizer stocks setting up for a bearish-to-bullish trend reversal.
Mosaic $MOS has been a huge laggard within that space, selling off in an orderly fashion over the past two years.
When I think of the ideal risk/reward set up, I think of charts that look like this:
Volatility hasn’t been this compressed in nearly a decade, and bears already failed to break MOS below a key polarity level.
These longer term reversals take time, which is why we’re going out further than we usually do in hopes of catching this potentially massive trend reversal.
