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Dollar entering a secular bull run

I’ve been in the dollar bear camp for quite some time. It’s not hard for me to admit that, as things stand as of now, my view has been wrong. It’s nothing wrong with that. What would be wrong is staying stubbornly in a position and doubling down despite the facts proving me wrong.

I recently wrote a post FX markets about to get interesting again! where I argue that despite the path currencies may take take, there is one that’s most likely. That is a path of higher volatility. Now I’d like to update you on the topic. In this post let me show that the dollar could be starting a new secular bull run.

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FX markets about to get interesting again!

I haven’t been focusing on currency markets much in the past year or so and there’s a good reason for it, volatility. Rolling 30 day standard deviation is sitting at 15 years lows, in some pairs even lower. This is very well reflected by charts where we can see multi-year consolidations or sideways trends, however you want to put it. I don’t know about you, but I like trending markets, and most currency pairs have not been trending in years.

It feels, however, times are about to change. Volatility could increase soon thus making FX markets interesting again and when volatility does increase everyone will go on about currency wars or some other thing to justify their narrative.

Let me start with showing you a volatility chart of individual pairs going back 15 years and continue with an overview of some majors.

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Major inflection point: recession or melt up?

So many guys have been pounding the table with doom and gloom calls for so long but they were dead wrong. When the market finally turns down they’ll likely pat themselves on the back and say they weren’t wrong, just early. As PLB rightfully says if you get direction or timing wrong, the trade is wrong. This is one of the most important aspects of trading not understood by most.

The market has been trading in a range for the past 18 months where SPX has been between 2,550 and 2,950 with a short trip to 2,350 last winter. All this time we’ve been hearing bad news about trade wars, tariffs, Brexit, growth slowdown, earnings recession etc. Stocks have been creeping higher despite all of this and are sitting just below all time highs. If you’ve been trading the non price related data you’ve been most likely losing money and are eager to short this bad boy yet again, right?

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Risk on

When reading financial headlines one could easily think the markets are selling off, we’re in a in severe downtrend where panic is just about to hit the main street. It’s really hard to find anything positive, and even if we get to read something that could sound a bit optimistic it’s accompanied by a word of caution, caution ahead of the next recession. Everyone’s obsessed about it.

I don’t know about you guys, but I like to stay open minded and being optimistic is a viable option too. It helps spending some time with family and friends during the Summer, and having the Adriatic sea at our fingertips is just a bonus.

Since the beginning of the year we’ve been bullish the stocks (Is it over?), bitcoin (Are cryptos trying to bottom?) as well as gold (Will gold bugs finally have their day?). It’s a ‘risk on’ environment, you know. However, is that about to change?

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How will the dollar affect stocks?

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?

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Will gold bugs finally have their day?

Last October I’ve started noticing some positive developments in gold just when stocks started to correct into Christmas eve’s bottom, see Rotation to gold and miners?. Since then it’s been firming up for possibly something bigger.

I’m not one of those gold bugs who’ve been advising to hold gold in the past almost 10 year long bear market. I don’t believe in some idealistic ideas with potentially huge opportunity costs. But when I see a good opportunity I try to grab it with both hands.

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Dollar about to rally?

The other day a guy tweeted to me that I couldn’t have been more wrong about one call. Yes, I do get them wrong, as much as 50% of them. If not more.

I often write about that, as I also say that for your (financial) well being is probably much more important to be able to manage risk effectively than to be able to make a higher number of calls right. But I get where the guy was coming from. In the world of instant gratification people feel the need to be right all the time and demand instant results. Go figure, ha? Is this also be a reason why so many traders converge to short term trading? I guess.

Anyways, let’s get to today’s topic. I was a dollar bear not so long ago, but the recent developments were making me change my stance to more and more neutral lately when I was becoming also more open to bullish scenarios. It’s ok if traders live in their idealistic world where they constantly feed their own biases, but this might not so profitable. To me it’s not hard to change my mind and admit my initial analysis was negated.

We saw a breakout attempt in the dollar a few weeks ago and it initially seemed it will be rejected. We can see this from the $DXY dollar index chart below, see circled candles.

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Don’t get caught up!

I don’t mean by the markets, but by yourself. Regardless of your system, you will have losing trades. Some of the best traders have a win ratio of only about 50%, so their predictive system is not much better than a coin toss. However they have great risk management in place and they know when to back off. Everybody experiences a series of bad trades, but only the best know when it’s time for them to stop to minimize the damage that would have been incurred otherwise.

If I could count how many times I was stopped out and how many times I experienced one of those series… numerous. But what prevented me from going bust was exactly that, knowing when to stop.

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New all time highs is not a downtrend

The S&P 500 index is back at new and fresh all time highs. Maybe this is not the best time to be writing a bullish post, it could backfire and we could see a 2015-16 bottom style retest. We have just seen an incredible 25% bounce in about 4 months, volatility is depressed and just about to burst. However let me remind you, I wrote a series of posts in October, starting with Winter coming?, warning you we could see a market crash, and then in Jan I flipped the side asking myself and my readers if Is it over?.

I was cautious along the way. The bounce could easily have been a bear market rally, but getting to fresh all time highs should reduce that likelihood, right? We were getting constructive signs along the way, let me just mention recent The most important market in the world right now post.

And while we’re back where we left it a good half a year ago, let’s discuss the current environment and why the party might not be over just yet.

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Tesla or TeslaQ?

Probably the most controversial company in the stock market is Tesla. People either love it to such extent they almost worship it or they dislike it so much they think it will be de-listed from the Nasdaq exchange. It seems there’s no middle ground. It also seems no other stock divides people that much.

If I said I care it would be a huge overstatement. I don’t. Why would I have to? And as much I’d want to dive straight into your favorite ideological debates, that’s not the intention of this post. I want to warn you of a potential deeper correction that might happen in Tesla’s stock.

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