The Dollar Rise is Destroying Stocks
The market turned decidedly lower yesterday. All major U.S. indices were down and most declined by more than 2% on the session.
The financials once again drove the market. Big bank stocks led the rally, which started last month. And the big banks have also been the biggest losers during the rare occasions the market turned lower.
While it is not uncommon for leadership sectors to pause during a rally, it's less common that they outpace their peers on both the upside and downside moves.
In fact, during strong trends, it's often that the leadership stocks, sectors and indices are defined by large rises on above average volume and miniscule declines on low volume - and the opposite is usually true during bear trends.
But yesterday the banks, which are also one of our leaders, declined heavily. The financial index was down 4% and big banks were down between 5% and 8% on the session.
I still want to be bullish here. But after a month of continuous positive movement, the indices deserve a break. Further, the euro has gotten obliterated.
While it's not always the case, generally speaking, the dollar and stocks share an inverse correlation. When the dollar goes down stocks go up. But now the dollar is increasing, and it's climbing at a rapid rate.
Yesterday, I briefly touched on the yen intervention, which sent the dollar weighted index, PowerShares DB US Dollar Index Bullish (AMEX:UUP), higher by 4% when the Asian exchanges opened. But today, the dollar is poised to add-on gains as it climbs against the euro.
The result of such gains, especially given the short timeframe, will spell disaster for commodities and likely bleed into the equity market too. The next target for SPX is 1220, which should prevent sellers from driving the index lower for a time, but if the dollar continues to rise SPX could end up back near 1197.
I still find it unlikely that another major decline is headed our way, this month. But it does appear that the bullish move from October has concluded. I continue to be more interested in buying pullbacks than going short, but if the indices slip through a few support zones over the next couple days I will have to alter my strategy.
