Those who follow our work know we are ambassadors of patience, risk management, and high probability asymmetric risk/reward scenarios. Simply put, we like to minimize losses while maximizing gains. Related to our top-down approach, we have been known to tell our readers that “cash is a position too.” Back in January, we shared with our readers an important development taking place using ratio analysis involving the dollar and the S&P 500.
Ratio analysis, which compares the price of two securities against each other, is valuable for identifying opportunities. Following up on our research from January, we’re going to review the U.S. Dollar Index (USDX) as it relates to the S&P 500 (SPX). (As a reminder, the U.S. Dollar Index is our proxy for the value of the U.S. dollar. This index uses a weighted mean of the dollar’s value relative to other select currencies. When USDX rises, it indicates U.S. dollar strength and when it falls, U.S. dollar weakness. If we ever want to take advantage of an appreciating dollar, we can use ETFs such as UUP to capture that move.)
Jumping to the visuals, here’s the chart we shared back in January:
And here is the same chart today:
As we can see, the S&P 500 has been flat (and volatile) since this ratio broke out from its downtrend. During that same time frame, it’s easy to appreciate the… appreciation… of the dollar (sorry, couldn’t help it). Up almost 10% year-to-date, this move is significant when we realize the dollar has broken out of a 30 year downtrend.
Since the breakout and 10% move, the dollar consolidated nicely and has recently broken out of a bullish pennant (see green trendlines in chart below).
Though resistance is ahead at the 99-100 level, it’s not too late to take advantage of this bullish (for the dollar) scenario. Nothing is guaranteed as price is the final arbiter of value. However, if/when the 100.00 level is surpassed, the next leg up could be just as powerful as the one that brought us to this point.
Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.