Conclusion: Short the US Dollar (UUP)
Our call 6 months ago was the same for the Euro as it is for the US Dollar now. The currencies of countries with burgeoning deficit and debt to GDP ratios are leading indicators for their domestic stock markets.
The US Dollar is getting smoked to lower-intermediate-term-lows today and the US equity market is cheering it on as “reflation” because that’s exactly what Dollar Down equated to during the 2009 phase of what we called Burning The Buck.
Unfortunately, inverse correlations and r-squares aren’t perpetual. There are always multi-factor and multi-durations to consider. As chaos theorists, it is our job to recognize these risks and intermediate term TRENDs as they emerge from immediate term TRADEs.
If the week were to end today, the US Dollar will be down for a 6th consecutive week. Not only is the immediate term TRADE line for the US Dollar broken, but the long term TAIL and intermediate term TREND lines are broken as well (see chart).
This time we don’t think the “reflation” TREND will recur because global equity and commodity prices don’t have the tailwind of accelerating global and domestic growth. Our outlook on US growth in particular for the next 3-6 months is actually for quite the opposite. The US stock market is sucking some people into the long side today, much like early 2010 rallies in European equities suckered people in as the Euro started to break down.
Keith R. McCullough
Chief Executive Officer