I guess everyone knows the saying ‘fool me once…’. The market tries to fool us not once or twice, but much more often. If it was straight forward, risk management wouldn’t be as important as it is. In fact, it’s the most important aspect of trading in my opinion. I believe finding the best opportunities and making the most money out of them starts with great risk management and not other way around.
In a recent post Dollar about to rally? I was exploring the dollar bull thesis. Frequent readers know that I’ve been a dollar bear for a long time now, and exploring the opposite side of an investment thesis is a must if you want to manage risk effectively. While the dollar is still in a sideways trend, last week turned the table in favor of dollar bears once again, which is my preferred stance. But why is this important and how could this affect the stock market and economy?
My view is that the highest likelihood event for the dollar and stocks is to move in the opposite direction.
This is what happened in 2017 and 2018 as we can see from the chart above, where both SPX and EURUSD (in gray line) rallied through ’17 and in ’18 moved sideways to down respectively. I believe this correlation is not about to end.
If the dollar indeed does rally, we know which pairs we want to buy (see Dollar about to rally?). In this case stocks could struggle going forward.
However should my base case with a weaker dollar prevail, the euro (yes, the euro!) and stocks in general (not only the US) could rally in tandem. The Christmas eve’s bottom, see Is it over?, could be the one we’ll discuss in years to come and a resolution higher in stocks may be just around the corner where SPX could rally much above 3,000.