Strengthening U.S. Dollar May Trigger Deeper Selloff In U.S. Stocks
Chris Vermeulen | May 16, 2022 10:24AM ET
Following and trading on price can be compared to reading a good book. As we read each page, we acquire additional information that may help us better understand the unfolding story.
The same is true of the market, as each day is like reading another page. The pages of a book make up chapters. These chapters in trading represent bull markets, bear markets, distribution and accumulation, and time frames of high and low volatility.
Unfortunately, in trading, we cannot skip to the end of the book to learn how everything turns out. However, as traders, we have learned that studying and remembering the past can pay great dividends.
Trading price in its rawest form is simply plotting and studying price without the use of moving averages, stochastics, RSI, or other technical indicators. This simplified but often overlooked methodology can offer everything a trader needs to be successful.
NASDAQ 100 (QQQ) LOWER LOWS & LOWER HIGH/h2
The Invesco QQQ Trust (NASDAQ:QQQ) has been making lower lows and lower highs. A longer-term analysis of price is showing us that the 2022 low is lower than the lowest price that the QQQ had traded in 2021. The QQQ in 2021 had a peak to trough range of 26.03%. So far in 2022, the QQQ has had a peak to trough range of 28.71%.
Therefore: Price is showing that QQQ is breaking down and volatility is expanding as it is greater than last year.
The SPDR S&P 500 (NYSE:SPY) has been making lower lows and lower highs. The SPY in 2022 has had a peak to trough range of 18.74%.
Therefore, price is showing us SPY is breaking down and it appears to have put in a major top with confirmation being a new swing low.
The Dow Jones Industrial Average ETF Trust (NYSE:DIA) has been making lower lows and lower highs. The DIA in 2022 has had a peak to trough range of 15.02%.
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Therefore: Price is showing us DIA is breaking down and appears to have put in a major top with confirmation being a new swing low.
Note: the DIA is doing better than the QQQ or SPY as money flow is rotating out of previously high-performing stocks and seeking safety in blue-chip lower performing stocks.
The US Dollar Index Bullish Fund (NYSE:UUP) has been making higher highs and higher lows. The UUP in 2022 has had a peak to trough range of 10.43%. UUP has also taken out the highest high that it made in 2021.
The price is showing us UUP has broken out to the upside and is in a bull market with confirmation being a new swing high.
According to the 2019 Triennial Central Bank Survey conducted every three years by the Bank of International Settlements: trading in FX markets reached $6.6 trillion per day in April 2019. The BIS report further noted the USD is associated with 88% of all trades, which is $5.8+ trillion in USD daily transactional volume.
The US dollar continues to attract capital from investors all over the world. But this may prove to be a double-edged sword for US stocks. As capital flocks to the USD, this, in turn, hurts US multinationals as they need to convert their weak foreign currency profits back into USD.
The USD safe-haven trade may eventually trigger a broad and deep selloff in US stocks. As the USD continues to strengthen, corporate profits for US multinationals will shrink or disappear.
In today’s market environment, it’s imperative to assess your trading plan, portfolio holdings, and cash reserves. Experienced traders know what their downside risk is and adapt as necessary. Successful traders manage risk by utilizing stop-loss orders, rebalancing existing positions, reducing portfolio holdings, liquidating investments, and moving into cash.
Successfully managing our drawdowns ensures our trading success. The larger the loss, the more difficult it will be to make up. Consider the following:
- A loss of 10% requires an 11% gain to recover
- A 50% loss requires a 100% gain to recover
- A 60% loss requires an even more daunting 150% gain to simply return to break even.
Recovery time also varies significantly depending upon the magnitude of the drawdown. A 10% drawdown can typically be recovered in weeks or a few months, while a 50% drawdown may take several years to recover.
Depending on a trader’s age, they may not have the time to wait on the recovery or the patience. Therefore, successful traders know it’s critical to keep their drawdowns within reason, as most of them learned this principle the hard way.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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