It has been a contrarian trade that has not yet worked out; by that I mean my short position on the Euro and preparation for a firming US dollar. Yesterday the market cheered the supposedly dovish Fed, and USD got smeared again as the world’s counter party paper boosted assets far and wide… on nothing but perceptions and a hell of a lot of momentum and gaming on FOMC day.

USD opened weak again today but so far at least, is sporting a Hammer which, if it stays in play, would be a bullish reversal candle.

Regardless, whether that is a bullish Hammer or not, Uncle Buck is due for a contrary bounce and it is coming due soon. Reference this ‘Currencies’ excerpt from this week’s NFTRH 457 and in particular, the sentiment and CoT profiles. Here is the over-bearish public opinion (graph courtesy of Sentimentrader, mark ups mine)…

From a post-FOMC update to subscribers yesterday…

I hate to be a party pooper, but in seeing all kinds of commodities and anti-USD items ramping up now and seeing this picture of USD making a new low, post Fed, I am brought toward the point of having to admit I was wrong on USD. I am toward that point but ever plucky, am not at that point! Not on FOMC hype and algos’ and robots’ reactions. I am still holding the euro short.

What’s more, I am actually feeling more bullish on the dollar as I think about it. The sentiment profile was stacked against Uncle Buck [contrary bullish] before today and I am wondering about exclamation points and the like. As in, could this week mark a low?

Anyway, just letting you know the captain is continuing to go down with his USD ship until it takes on a critical mass of water. There was an article at MarketWatch today citing a strategist at PIMCO talking about why the Trump admin is bad for USD and therefore, bearish. A well placed contrary indicator? They don’t all work, but I want to let it breathe a bit more and see.

Another point from the update is that the stock market is unlikely to benefit from a firming US dollar.

A final note on USD. We have shown that a strong dollar has been a negative for the stock market, on a delayed time frame (strong USD in 2014 leads a market correction in 2015) and that the market’s post-Trump rally has gone hand in hand with USD’s bear phase. If the buck breaks, I’d expect continued mini-mania in stocks. If it reverses, I think some pressure would be brought to bear.

Here is the chart that proves my point. The impulsive rise in USD (the breakout to which we caught in real time in mid-2014) stopped the stock market’s momentum and then in 2015 brought on the first real correction since 2011. Going the other way, the chart makes it patently obvious that a declining US dollar – ostensibly on Trump fiscal policy projections – has gone hand-in-hand with the post-election rally.

So what of the stock market if Uncle Buck gets a new bounce in his step? I think you know what of… at the very least momentum would grind down and signal an oncoming correction or dare I say it, even the end of the bull. Right now I am not expecting a new bull market cycle in USD, and I am also not yet expecting the stock bull market’s end. But a strong bounce in the senior currency should be enough to bring the pressure on asset markets, so well gamed during USD’s bear phase. Did you see them fly like turkeys (I know, I know… ) into the mature commodity bounce and EM plays yesterday, post-Fed? If USD firms as expected, the greed of man and machine will be punished.

The gold bugs as well joined the party. The sector has after all been on an expected bounce. I am slowly adding positions in quality miners (while hedging in the short-term), but yesterday proved nothing, technically. Just as I maintained my euro short in the face of yesterday’s greed fest, I not only held on to miner hedge DUST, I added to it near the highs of the day as HUI poked the SMA 200, which would be a key resistance parameter to be taken out in signaling a real bull phase.

Before ardent gold bugs turn me off, note a post yesterday explaining the bad and the good for the sector. There is plenty of good in development, and that is not including the positive gold seasonal average beginning in August.

‘But Gary, how can you be preparing to get bullish on the gold sector while getting bearish on the rest of the anti-USD crowd?’

Easily; take a look at the ignominiously poor performance of the gold sector during the span of USD’s savage decline to support. This while certain commodities and markets gain big momentum bids as everyone chases the anti-USD trade.

But of course, it is not just a simple chart that needs to be followed. You have got to have your macro fundamentals straight, which means tuning out inflationist gold bugs who want to run with copper, oil, EMs and other things that go in positive correlation to the global economy. If the US dollar – against which the stock market has been levered – rises we will see how long confidence remains firm. If gold starts to out perform the confidence trade, it will be the time to get aggressive in the miners.

So to put it succinctly, I am very capable of being constructive on both the US dollar and the gold stock sector concurrently. Indeed, the best investment atmosphere is during disinflationary times for asset markets, not the times when hot inflationary plays are popping up all over the planet.

Bottom Line

If the US dollar firms and rises, it will eventually wear at the stock market. Per the USD/SPX chart above please note the word “eventually”. The market is entirely capable of staying aloft in the short-term against a bottoming/firming USD just as it did from July 2014 to July 2015. But a clock would be ticking. None of this is even taking into account the work we’ve done recently on the 30 month cycle and the Fed Funds vs. 2yr yield.

As for the gold sector, it is in waiting… eternally as it seems. There is a reason I added to my hedge during yesterday’s momentum party; the sector should not go to the party. It should not get the pretty girls. It should be the dork outside looking in. It should be counter to all that stuff. Just as it did in 2008*, I expect that the things that drive a bullish US dollar would also drive the gold sector once we signal either a bottom or an upside break of resistance parameters.

Let’s not forget about the 2 Horsemen either. The Gold/Silver ratio and US dollar would ride together to slay market liquidity. So keep an eye on gold vs. silver as well. I realize I am the writer that confuses the hell out of some people (they’ve told me so) but that’s the way it’s got to be. This stuff is not easy and cartoon-like analysis, easy answers and charting in a vacuum are not helpful. I’d rather end up being right than easy to understand.

By Gary Tanashian