So far this year, the S&P 500 has dropped 3% or more in one session 3 different times. The two previous times, it clawed back some of the losses over the following week. We’ll have to wait and see of there is any upside after yesterday’s big drop.   

The S&P 500 is now testing the lows from the “flash crash” on May 6. This is interesting because it was assumed that trading that day was something of a fluke as computer trading programs went haywire. But now that stocks are back to those levels, we must consider that the drop may not have been a fluke.  

The question now is: can stocks find some strength? Or perhaps a better way to ask the question is: are the sellers done?   

Somebody knows what do about the U.S. dollar rally we've seen lately.

A recent regulatory filing with the SEC on February 16 shows that George Soros' Soros Fund Management has doubled its holdings in the SPDR Gold Trust (NYSE:GLD). Soros is now the 4th biggest investor in GLD. John Paulson's hedge fund, Paulson & Co. owns the most GLD, with 31.5 million shares.

I discussed Soros gold investment in a recent Daily Profit. Soros believes gold is likely to become a "bubble asset." Low interest rates and concerns about the global economic recovery would be the driving catalysts. But as we know, bubbles occur when buying begets buying.

Gold is currently trading around $1,095 an ounce. Price estimates from Goldman Sachs and HSBC call for gold prices to rise to the $1,235 to $1,300 range. But I think Soros' position suggests he thinks it could rise even higher than that.

And that's the thing about bubbles. Once they start, it's hard to say how high prices can run.

Now, as you know, I'm usually a fundamental investor. I like to buy reasonably valued companies that are taking advantage of important economic or consumer related trends. At the same time, I believe gold should be part of any portfolio, especially now.

As you can see from this U.S. Dollar Index chart, the dollar has put in an impressive rally. Much of the reason for this has to do with weakness in the euro due to debt problems with Greece. (We can include potential problems with Spain, Ireland and Portugal as well.)

At some point in the not too distant future, the U.S. dollar will weaken. And that's going to send gold, and other commodities higher. Potentially much higher. Gold alone could easily move 20% higher. And that will mean significant price movement for gold mining stocks.

It was just last Thursday that we discussed "talking one's book" and made special mention of George Soros. If you missed that issue of The Daily Profit, talking one's book means advocating a belief in public that supports one's trading position, regardless of whether you actually believe it's true.

So it's interesting that Soros has a piece in today's Financial Times where he states that "The survival of Greece would still leave the future of the euro in question." He goes on to say that the aid package for Greece won't work for Spain, Italy, Portugal or Ireland.

Now, if we check the chart we can see that the U.S. dollar has been rallying. Part of the reason for this has been weakness of the euro due to debt problems in European countries.

The recent spike higher by the dollar was a response to the Fed's discount rate hike. And quite frankly, it looks unsustainable. I think we can assume that Soros is short the euro, and he may even be trying to cover that short right now, in anticipation of a rally for the euro.

Of course, a rally for the euro would send the U.S. dollar lower. That, in turn, will be good for U.S. stocks, gold, and oil.

You've heard me call out big-name investors who are "talking their book" in the past. An investors is "talking his or her book" when he/she states an opinion as fact for the sole purpose of helping a particular trade.

We've seen Warren Buffett do this. Last year, it was widely known that he was massively short the U.S. dollar. And he continued to say he thought the dollar was collapsing, even as it hit important support. Then we learned later that Buffett was covering his dollar short, all the while extolling its weakness.

Obviously, Buffett, in true P.T. Barnum fashion, was attempting to use his influence to talk the dollar down while he covered. He only needed to fool people for a short time as he exited the trade.

Last month at the Davos conference in Switzerland, George Soros did his version of talking his book. He made headlines when he said "The ultimate asset bubble is gold."

I always view statements like these with skepticism. And sure, recent SEC filings reveal that at the same time Soros was saying gold was a bubble, his Soros Fund Management was buying 6.2 million shares of the SPDR Gold Trust ETF (NYSE: GLD) for $663 million.

Looking at this 6 month chart of GLD, it's a reasonable guess that Soros was buying between $105 and $110 in December (you may need to zoom in on the chart in order to see all the information). Gold is on the verge of breaking above that range now.

It would be easy to think that Soros was simply pulling a fast one on unsuspecting investors. But this is a case where it pays to know a little more about the man and his methods. Here is a Soros quote from the early '90s:

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited."

I love that quote, even though it's a bit cynical and perhaps depressing. But what he is saying should be a revelation to any investor, because it requires the investor to maintain a sense of skepticism.

I also want to emphasize that companies do make money, they grow, and their stock prices will reflect this. In other words, there are fundamental reasons for stocks to move. But Soros is talking about making the big money.

As late as 2007, Soros was calling the housing boom a bubble. I also think we can assume he made a lot of money during the housing bubble in the sectors that were supporting the housing bubble, like commodities. And there's no doubt he was well-positioned when the bubble burst.