The Dollar is Getting Stronger
It’s no secret that the U.S. dollar had been much weaker than it was expected to be for a while. That’s starting to change. Cash is once more gaining a foothold in the market as the stock market keeps spiraling up and up in price. The big issue here is risk, and a common response to this is to unload some of the more volatile stocks and transfer assets into cash holdings. The immediate response here is that U.S. stocks get weaker, and the dollar gets stronger. This has already started to happen in a few places, actually, even though the Dow Jones Industrial Average is currently at an all time high point.
The thing to remember is that the Dow can theoretically get stronger at the same time as the dollar. This doesn’t happen often, and it doesn’t happen for long, but it can happen.
The shying away from stocks happens gradually, allowing for this anomaly to happen. So, even though the dollar and the U.S. stock market have a negative correlation, the correlation is not a perfect -1 on a statistical level, which means that there are rare occasions where the major indices and the dollar move in the same direction. Right now seems to be one of those times.
But this doesn’t mean that the signs are not beginning to show. For example, in rough financial times, the financial services industry is often one of the first places to show the stressors. People find it really easy to sell off stocks when this happens. And once their holdings are converted to cash and their trading and investing cash goes into a bank account, that is money that the financial services company can no longer use to help create more profit for themselves. Companies like insurance agencies and underwriters suffer harder than brokerages and advisors because insurance is often seen as a luxury item, so this is often one of the first things to be cut in these instances.
Look at Bank of America, for example. This is one of the U.S.’s biggest banks, and they do most of their business here unlike some of the other major banks like HSBC, so that means that they will be hit harder when this happens. On Tuesday, May 13th, The Dow went up to another record high before the closing bell, and Bank of America (BAC) fell by almost half a percentage point. This might not seem like a big deal, but it is something that has been happening for quite a while. Over the last three months, BAC has fallen from almost $18 per share, down to under $15. All this time, the Dow has been steadily climbing, distancing itself from what’s happening within the U.S. financial services industry.
Usually, it is only a matter of time before the overall trend of this major index catches up and the true relationship between the Dow and the dollar comes to light. So what should traders do right now to prepare for this? That’s a tough question, because there’s no single “right” answer. There are a lot of things that will work, and many more that might work. The best choice is usually to try and ride these trends while they are ongoing. But because there is nothing definite going on yet, this might prove to be difficult. Short term positions are the best in these cases so your cash is not unduly tied up for too long and you can readjust your positions as needed in order to maximize the profit. Having the ability to trade down, either with short sales or put binary options is a plus.