What If The Dollar Stays Bearish (Downward) Trend?

1.) US DOLLAR – The stock market has been dealing with a pretty big problem lately… a stronger dollar. It may not seem like much, but in currencies, a move from $95 to $101 is pretty big. That’s what the Dollar Index has done this year. A strong dollar can make things harder for stocks, gold, and other commodities, and it can also hurt large American companies that make a lot of their money overseas. But that hasn’t been the case. So the question to ask now is if stocks can behave this well with the wind in their face, what happens if the wind suddenly starts blowing from behind? That could be on the way as the Dollar Index now has some decent resistance at that $100-$101 level. 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 stays there. But in this case, the dollar couldn’t. That created a line in the sand. Above $100-$101, we can have a different conversation. Below it, I think a falling dollar could become a boost for stocks and metals.

2.) GOLD – Gold broke out on March 4, 2024, and from there, the whole complex basically caught fire. By late January this year, the move had gone far enough. Gold finally peaked, sentiment got too hot, and precious metals entered a brutal corrective wave that lasted most of the first half of this year. That magnitude of a correction is painful for investors who overstayed their welcome…but it was also normal. I don’t think Gold is going to go straight up from here, but it is looking more and more buyable, and the Dollar situation is helping. But there’s something else that is important here as well: the Euro. That might sound strange, but the euro-dollar cross is the most important currency pair in the world. It also makes up a huge portion of the U.S. Dollar Index (DXY), so when the euro rallies against the dollar, it usually creates a much friendlier environment for precious metals. That matters because precious metals don’t have cash flows. They’re purely liquidity-driven assets. When the dollar is strong and global liquidity is tightening, gold and silver usually struggle. When the dollar weakens and liquidity expands, the metals can move. It is starting to look like the Euro/Dollar could be setting up again. Does that alone suggest Gold is ready to rip higher? No. In fact, Gold still looks like it has some work to do. But it is putting in a constructive base while other factors (US Dollar, Euro/Dollar pair) become more positive as a backdrop.

3.) VIX – The VIX (volatility for the S&P 500) does a pretty good job of pricing in the next month or so of volatility. Here are the median forward returns and drawdowns over the next month based on where VIX has been since data began in 1990. VIX closed the month of July at 16, trading this morning at 15.43.