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.” When reviewing the cash position, we like to study the U.S. Dollar Index (USDX). 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.)
As we’ve highlighted in the past, using a big picture perspective, the world’s most important currency has broken out of a 30 year downtrend:
Looking closer, we can see the USDX has been trading sideways for over a year. In addition, we can quickly identify U.S. dollars have been outperforming an investor favorite, the S&P 500, for almost 1.5 years. And you thought “cash is a position too” couldn’t be an appropriate investment strategy? Well, if cash is outperforming stocks, we would say it is the preferred position. That being said, back in March this dynamic changed. The U.S. dollar began underperforming U.S. stocks. Which brings us to today. The USDX is now at an important price point. What happens at this level will impact many markets and asset classes. Accordingly, we want to pay close attention to this development.
Since early 2015, sellers have shown up at the $100.00 level and buyers have stepped in at the $93.00 level. Today, we’re near that very important $93.00 level again. Will buyers step in for the sixth time in 1.5 years? Time will tell, but the bullish falling wedge (annotated in orange) is a promising development for those who want to see USDX move up from here. However, on the flip side, there is nothing more bearish than a failed bullish pattern. If the U.S. dollar drops (or pops and drops) from this pattern, it is a bearish tell.
The line in the sand is $93.00. If USDX were to break below that level, it likely would mean a trip to $87.00 and have a major impact on various markets and asset groups. We like it above $93.00. Below that, someone else can have it.
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.