Last week was a huge turning point in the global financial markets. I’m not talking about the US stock market, even though that is what all the financial media in the United States ever talks about. I’ll make note of it in a bit, but what I’m talking about are the global currency markets. Last week the US dollar index had its biggest two day decline in thirteen years. The volatility with currencies was extreme on a historical basis for them. Take a look, for instance, at the ETF FXF, which tracks the Swiss Franc.
Just like that, the Swiss Franc surged and closed above its 150 and 200-day moving averages.
Here is a chart of the US dollar index itself, so you can see how it rolled over last week to close below its 150-day moving average.
The rally in the US dollar index, that was fueled by the fact that the Federal Reserve was more aggressive in hiking interest rates than other central banks came to an end, because the Fed is now set to reduce the size of its rate hikes. A falling US dollar will also increase the inflationary pressures inside the United States in time. It won’t matter as a factor for the rest of this year, but it likely will by next summer.
Stock market bulls do not look that far ahead, so that doesn’t matter to them. Most young traders on apps only look at daily gyrations and, so, when they see the market go up they buy what they see others buying on their apps. They have zero interest in what might happens in six months. But, that is why they always are behind the eight ball and never can sink it into the pocket. If only they would ask what they need to do to play a better game.
If you want to beat the markets you want to be in what benefits from a falling US dollar now and what is outperforming the S&P 500!
A falling dollar helps gold and precious metals, but it also helps markets outside the United States perform better than the S&P 500. I put some money into European ETF’s last week. Take a look at EWG, which is the ETF for Germany.
EWG pays a dividend of 4.93% and has a P/E of 3.60.
Yes, you read that right 3.6!
The rise in the dollar, up to now, has created an opportunity for Americans to buy into markets outside of the United States at cheap prices!
To see what I mean, look at how EWG performed, relative to the S&P 500, from 2003 to 2008.
EWG vastly outperformed the S&P 500 from 2003 to 2008, because the US dollar index was in a bear market. When the US dollar index went into a bull market, after 2011, EWG underperformed the US stock market. That was a time in which German government bonds gave investors a negative yield! Now that the Fed is set to slow down the pace of its rate hikes, it looks like the US dollar index is rolling over.
Rises and declines in the US dollar index have a huge impact on macro investors. People can use the changes in currency values to their advantage to beat the performance of the S&P 500.
I fully expect EWG to outperform the S&P 500 and Nasdaq going forward from here.
You can look at other foreign market ETF’s and find similar P/E ratios and dividend yields as EWG.
One thing about this chart, though, notice how the relative strength ratio for it began to go up at the end of August.
That’s when the S&P 500 made its last significant peak.
If you want to beat the market, look for sectors, stocks, and ETF’s that have been outperforming the S&P 500 since that August peak in it around the Jackson Hole meeting.
Back in June, and early July, I did a lot of selling in my accounts and greatly reduced my long exposure when silver broke below $21.00 an ounce.
Now that it has gone back above that level, I have upped my exposure back up.
So, this month, I have bought mining stocks, gold, silver, commodities, foreign markets, and material stocks.
The latter is a sector that has been among the top performing sectors since Jackson Hole and historically is a sector that benefits when inflation grows.
One stock I bought, for instance, is VALE.
I bought VALE in 2020 and sold it in June/July. It pays a 10.19% dividend and has a P/E of 4.08.
It’s a giant Iron Ore and materials conglomerate based in Brazil.
As for the US markets, last week’s move does suggest that we can get more gains, but it’s still a bear market rally.
Maybe the Nasdaq 100 will get back up to its 200-day moving average in the next few weeks.
You can see, though, that the QQQ’s have been under performing the S&P 500 all year.
I have zero interest in buying it or the popular big cap tech stocks that dominate it that everyone still wants to play.
I don’t think the inflation story is over.
But, we are in a moment, like July, where bulls can dream it is, because of what they are seeing happen on the daily gyrations on their apps and so they will buy with what money they can get into those apps to double down with.
As far as Bitcoin goes, DO NOT BE TEMPTED by the crypto gurus into buying it. They told you Bitcoin would go up when the dollar fell and the dollar just had its biggest decline since 2009 and Bitcoin crashed. Perhaps everything they have been telling you has been nonsense.
If I owned virtual crypto currencies I would sell them and then buy something real with the money.
I’m more interested in things beating the market, setup for sustainable moves, and that’s why I focus on what are truly turning points in the markets and we had a big one this week in the global currency markets. That’s what’s fueling the new rallies in gold and silver.
Also note that EWG went up Friday almost 3% and the QQQ’s went up almost 2%. EWG closed above its 200-day moving average on Friday and the QQQ’s still remain below that key indicator.
If this is the first time you have read my stuff you need to join my free email update list to get more.
To subscribe just click here.
-Mike
