Teeka Tiwari

The Best Hedge Against the Falling Dollar

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After delivering a series of bearish indicators -- each one larger than the previous one -- we saw the Dow (DJI) turn around and break out to new highs.

We've seen similar reversals since the March lows. But the quality of this reversal is far-below what we've seen thus far.

In previous sell-offs, we saw between three and six sectors posting sell signals while the rest of the market plowed higher. This time, 38 of the 46 sectors we follow at Sector Hunter are on a sell signal!

Is This Rally for Real?

The market internals are radically different from the picture that the Dow is painting. If the new high in the Dow is for real, why hasn't it been confirmed by a new high in either the S&P 500 (SPX) or the Nasdaq (NASD) yet?

The declining U.S. dollar is being used as an excuse to snap up the big American export names. The logic is twofold:

1. It is presumed that a cheap dollar will make our products cheaper to foreigners buying them in their own currency, thereby stoking demand.

2. As the big multinationals repatriate their euros, yen and francs back to U.S. dollars, they will get a currency-bump boost to earnings as they convert their foreign currency denominated earnings back into U.S. dollars.

And, of course, we have the effect of the "carry trade" at work. That is, people borrowing U.S. dollars on the cheap and then reinvesting those dollars in higher-yielding assets such as equities.

Does this mean that, if the dollar rallies, the markets will fall? It's certainly beginning to feel that way.

While, over the long term, the dollar looks like it wants to go lower, it's very oversold at the moment. And, at the minimum, the dollar is due for some type of counter-trend bounce.

What Happens When the Money-Printing Press Runs Dry?

The other side of the dollar trade is the impact it's going to have on the U.S. consumer. If no hard floor is put under the dollar, aren't we going to experience horrific commodity price increases here in the United States?

In a booming economy, I guess that's no big deal. But in a prolonged recession, it's got to feel like an economy killer. Hello, 1970s all over again?