Stocks cracked under pressure by a soaring U.S. dollar on Tuesday, finishing at their lows for the session.

There was no specific catalyst for the risk-off trade besides the moonshot by the buck, though if you had to point a finger it would be aimed at the merciless gutting of commodity prices as well as the shares of companies in commodity-dependent countries such as Brazil, Russia and Malaysia.

The All-Climate Portfolio system continues to recommend that investors remain in cash (and inverse oil and gold) as it senses that an entry with a higher probability of success lies ahead. That does not mean that any coming entry will be lower than the current price — only that it would have better odds of success. The underlying data in the model has improved in synch with the recent setback in stocks’ valuation and the expression of panic, but not enough to muster a buy signal.

The Dow Jones Industrials finished with a whopping 332-point, or -1.85%, loss, its worst setback since October, while the S&P 500 fell 1.7%, the Nasdaq 100 fell 1.9% and the Russell 2000 fared best, down only 1.2%, largely because small-cap stocks are the least likely to depend on overseas sales and thus are least vulnerable to the buck bomb.

Quick run through the news:

The fiscal and monetary policy divergence theme remained in play Tuesday. While the bulk of the focus late last week was on the support for a mid-2015 “liftoff” in U.S. interest rate targets by the Federal Reserve, this week it has been the euro zone dominating sentiment. The quantitative easing program launched by the European Central Bank on Monday gained momentum Tuesday with most peripheral bond yields hitting fresh lows. The euro came under pressure, ending the day down 1.3% against the dollar at $1.07, its weakest level in nearly 12 years.

In response, the dollar ripped higher by 1% and emerging market stocks collapsed by 2.2%. This gives me a chance to point out that while the effect of lower crude oil prices has taken a big bite out of energy conglomerates’ earnings, foreign exchange has played a larger role in negative earnings revision trends.
Bottom line: The big decline Tuesday, following a similar setback Friday, looked worse than it was. There have been a lot of close-set smack-downs during the bull cycle that started in 2009 and none have proved fatal, or even close.  Unless something important has changed, before too long bulls should be back to their old tricks, taking advantage of the pause in sentiment.

As always, please contact with any questions.

 

Sincerely –

Greg Franklin

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