Monday, February 21, 2011

Stock Market Selloffs Ignite U.S. Dollar Rallies

The inevitable periodic selloffs in the general stock markets indiscriminately hammer all stocks lower.  But they pose a special magnified risk to commodities stocks.  In addition to weighing on this sector directly, stock selloffs ignite fast US dollar rallies.  This rapidly drives dollar-denominated commodities prices lower, amplifying the selling pressure faced by commodities stocks.

The threat of a stock-market selloff is particularly relevant today.  The flagship S&P 500 stock index (SPX) is extremely overbought technically, and sentiment is wildly complacent and bullish.  Key indicators reflecting traders’ collective psychology are pegged near dangerous levels from where past major SPX selloffs started.  Right now the stock markets are as ripe for a major correction as they’ve ever been.

Meanwhile the Continuous Commodity Index (CCI) continues to achieve new all-time record highs, reflecting similar exuberance in the commodities realm.  And the benchmark US Dollar Index (USDX, the best proxy for this currency) is relatively low with lots of room to soar.  I can’t imagine a more-perfect scenario for an SPX selloff igniting a USDX rally that temporarily crushes commodities prices!

Adam Hamilton, CPA
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