What Direction Will This Asset Class Take Next?

October 5, 2021  |  Michael Reilly

Mike Reilly Director of RiskManagement, Rowe Wealth ManagementThe implications are enormous…

The direction this asset class takes next can impact every single asset class you invest in

It’s all about the greenback.

Before we get into what price is telling us, let’s talk about some of the fundamental reasons why the dollar is moving the way that it is and why it really matters.

Here’s what investors will want to know…

China’s slowing growth has reignited the US Dollar (USD) as a safe haven as the world’s reserve currency.

This flight to safety happens when another country – especially the world’s second-largest economy (China) – runs into political or economic uncertainty.

It’s caused a sharp rally in the greenback, as you’ll see in the price charts below.

And it’s not just China…

When the Fed then comes along and signals they intend to reduce debt purchases, it is widely considered positive – pushing the USD even higher.

But if the rally happens too quickly, it can hurt U.S. exporters by making their products less competitive and more expensive abroad.

Now on to the technicals…

Here’s a chart of the USD using the Invesco DB US Dollar ETF (UUP) as a proxy.

The dollar has rallied sharply several times this year – once from its January lows, and again in June, and most recently off its August/September ‘21 lows.

These rallies have pushed the USD to higher levels not seen since November of 2020.

But following last week’s sharp move higher, UUP gaped down, signaling what may be a last gasp of the dollar for a while.

That’s an important signal for investors to watch because the implications here are global and will likely affect nearly every investment you make.

Because if we’re right, and the dollar declines from here, investors should watch Emerging Markets, Commodities, and risk assets in general to see if they catch a bid.

Investors will want to act accordingly by making room for assets that profit from a weak USD.

Below is a chart of the NYSE Advance/Decline line, followed by a price chart UUP.

Pay attention to how stocks stopped advancing right around the same time the dollar bottomed and reversed higher. This area is highlighted on both charts.

So a move in the USD, in either direction, has a ripple effect…

It’s a similar picture on a sector level.

Take a look at both Industrials and Materials – see how they stopped going up when the dollar bottomed?

Now you can see why you want to pay attention to dollar strength…

Watching the dollar matters to your bottom line. If the USD does in fact reverse lower, that’s a positive development for many stocks around the world.

But why do we think the dollar is due for a pause?

This is where Fibonacci comes in handy. In the next chart, you can see the recent USD strength running up and into former resistance at a key Fibonacci retracement:

If you look closely, you can already see the dollar turning down, bouncing off the Fibonacci level – coincidence? Definitely not.

We see this time and time again as assets push up against their own Fibonacci levels.

And often, they fail to break out above these levels – at least at the first attempt.
Will the Dollar index be any different?

Well, obviously no one knows for sure.

And for that reason, it’s usually a good idea for investors to consider both possibilities.

What if this is a fake-out and the dollar does break-out? What would that mean for risk assets?

The short answer… it probably wouldn’t be great for stocks (see NYSE A/D Line above). So, buyer beware.

Stay tuned as we track the implications of the USD…

Until then, invest wisely, friends.


PS: Hey listen, we understand that following all the asset charts and trying to make sense of the markets can be time-consuming and frustrating. To make it all easier, give us a call. We’re opening our doors to new investors who have portfolios valued over $500,000. If you’d like to schedule a free 1-hour consultation to review your portfolio, click here.

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