foxex: Dollar Days

Chart Advisor | Focus on the Price

Wednesday, September 23, 2020 Headlines

1. The U.S. Dollar breaks out of its downtrend and stocks move lower again
2. Where is the money going?
3. How to prepare for the bear

Market Moves

While stock indexes resumed selling action today, the U.S. Dollar index (DXY) capped off a three-day rally marking the end of the downtrend there. With the S&P 500 (SPX) closing 2.37% lower today, it seems possible that the greenback is signaling a continued slide ahead for stocks.

The chart below displays one possible way to take advantage of a continuing downward move in stocks and a new upward trend in money market indexes. This chart shows Invesco's 2X dollar index ETF (UUP) and diagrams a sloping triple-bottom pattern. Notice how the price action displays resistance at the downward trend line until early September. After that point, the line serves as support. This is often an indication that a new upward trend may be brewing.

Where is the Money Going?

Many analysts are asking an important question right now. If traders and investors are pulling their money from stocks, where are they putting it? Answering this question can help investors know whether to expect the markets to resume their upward trend sooner or later.

Looking at the following three charts below: Microsoft (MSFT), State Street's Consumer Staples sector index ETF (XLP) and their Utilities Sector index ETF (XLU), it appears the answer is not here. Neither commodities nor bonds appear to be catching the money fleeing stocks right now either. The only place that seems to be growing in demand is cash. That is typically a bearish sign.

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How to Prepare for the Bear

The market price action does not seem to imply investor panic. The CBOE Volatility Index (VIX) is not flying higher, and stocks, though falling, are not crashing. This appears to be a case of investor uncertainty, something the market hates. Once a greater degree of certainty has entered the market psyche (whether over COVID or over the U.S. elections or both), then the upward trend will likely resume. For now though, we'll want to keep an eye on as many forward-oriented indicators as possible.

To that end, the chart below displays the latest capture of the Stop-Go chart indicator I first wrote about in the book, "Invest to Win," which I co-authored with Toni Turner. She and I noticed that when money flows into the Utility sector at the same time stocks are going lower, it is a very reliable indication that the market is facing months of weakness ahead.

What the chart shows is that State Street's S&P 500 index ETF (SPY), shown by the blue line, has fallen further in the last month than that company's Utility Sector index fund (XLU). At the same time the Average True Range from a monthly time frame has risen over the past month. If this condition persists for two months, it presages the potential for 3 to 9 months of bear-market activity. This signal has proven 90% accurate over the past 100 years, so I always keep a chart of it handy for reviewing under just such circumstances as right now.

The Bottom Line

As stock indexes continue to decline, it appears the money is moving mostly into cash. This may be an opportune time to take advantage of the money market indexes. Although stocks are falling they don't appear to be crashing. This means investors are not yet panicked but are nervous right now. When certainty again enters the market the uptrend will likely resume.

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