The stock market has been dealing with a pretty big problem lately.
The U.S. dollar has been getting stronger.
Normally, that can make life harder for stocks and other investments around the world. But the stock market hasn’t seemed to care.
The S&P 500 and the Dow Jones Industrial Average closed Friday at their highest levels ever. Underneath the surface, more and more stocks are joining the rally.
That last part matters.
When the stock market is healthy, you don’t want just a few giant companies doing all the work. You want to see strength spread across different types of companies and different parts of the world.
That’s exactly what’s happening.
Stocks in Europe have been breaking out to new highs. Developed markets outside North America are at their highest levels ever.
And they’ve been doing it while the U.S. dollar has been getting stronger.
A strong dollar can make things harder for stocks, gold and other commodities. It can also hurt large American companies that make a lot of their money overseas.
Think of the stronger dollar as the stock market running into the wind.
You can still run fast. It’s just harder.
So if stocks can behave this well with the wind in their face, what happens if the wind suddenly starts blowing from behind?
We might be about to find out.
The Dollar Is Failing at the Exact Level That Matters
There’s a number I want you to remember.
You don’t need to understand how the U.S. Dollar Index (DXY) is calculated.
All you really need to know is that it gives us a way to measure the dollar against several other major currencies around the world.
And the area around 100 to 101 has been important for a long time.
Recently, the DXY rallied back above 100 and tried to keep going.
It couldn’t.
The dollar ran right into the same area where it had struggled before and turned back down:
Markets have memories. Certain prices become important because buyers and sellers have fought over them before. When something finally breaks above one of those levels, we want to see it stay there.
The dollar couldn’t.
So now we have a simple line in the sand.
Above 100-101, we can have a different conversation. Below it, I think a falling dollar could become a major boost for stocks and metals.
Look at what has already been happening.
Gold has been incredibly strong. Sam wrote about it yesterday.
Industrial metals have been doing well. Materials are improving. International stocks are making new highs.
A weaker dollar could give all of them another push.
Gold might be the easiest example. Gold and the dollar often move in opposite directions. Not always, of course, but often enough that we pay close attention to the relationship.
If the dollar keeps falling, gold could really get going.
But this is much bigger than gold.
Copper and other commodities are generally priced in U.S. dollars, so a weaker dollar can make them more attractive. It can also help big American companies that sell products overseas because the money they earn in other currencies becomes worth more when converted back into dollars.
It can also make it easier for money to move around the world, which tends to be good for investors.
The best part is that we don’t need to predict any of this.
We have our number.
As long as the Dollar Index stays below that 100-to-101 level, I’m treating the weaker dollar as a tailwind.
The Timing Couldn’t Be More Interesting
There’s one more part of this story that I think is being overlooked.
The stock market has certain times of the year when it’s historically done better than others. There’s even a pattern connected to the four-year presidential cycle.
No president controls the stock market, of course. But when we look back through history, certain parts of those four years have tended to be better for stocks than others.
Right now, we’re moving through what has historically been one of the toughest stretches.
In other words, this was supposed to be the hard part. Instead, the S&P 500 and Dow just closed at record highs.
That tells me something.
This market has been taking punches and staying on its feet.
And the calendar is about to change.
Around the end of next month, we begin what has historically been the strongest nine-month stretch of the entire four-year presidential cycle.
That doesn’t mean stocks have to go up. Nothing in markets works that way, and I would never buy a stock just because the calendar tells me September is ending.
But history can give us clues. Those clues become much more interesting when the market itself is already acting well.
That’s where we are today.
We’re heading toward a historically strong period with stocks already at record highs and the dollar potentially rolling over.
A lot of people spend their time searching for the next thing that is going to knock the stock market down.
I’m more interested in what could push it higher.
Right now, the dollar is near the top of that list.
Stocks have already been winning with the wind in their face.
What happens when the wind finally gets behind them?
This Week in Everybody’s Wrong
On Monday, we celebrated the fact that Victoria’s Secret is bringing sexy back.
Making the company ticker symbol “VSXY” is funny, it’s clever, and it’s the right thing to do.
But there’s more to the story than a bunch of really good headlines.
On Tuesday, we saw that Europe did something that hadn’t happened since the turn of the century.
After surviving a financial crisis, a debt crisis, Brexit, COVID, inflation, and wars, European stocks just got back above the highs they made when people were buying Pets.com.
How many parts of the world are only now getting started?
On Wednesday, we explained how it’s hard for most of us to let go of what we think we know.
But big opportunities can come from looking at something old with fresh eyes.
For example, what if General Electric is just getting started?
On Thursday, we explained how markets reward adaptation.
Money is still flowing into technology, just not names that dominated the last cycle.
On Friday, we asked whether you’re helping yourself build wealth or helping your app build revenue.
When you understand how companies get paid, you see the world in a different way.
The best investors I know don’t place dozens of sports bets every day.
On Saturday, we welcomed back Sam Gatlin for an update on gold.
With his deep perspective and command of the material, it’s easy to forget he’s the young gun in our cast of characters.
Here’s Sam with a good look at the world’s oldest form of money.
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs