Is It Time To Buy or Sell in the US Stock Market? The DXY Is the Signal To Watch
A crucial indicator that you must learn to master.
The US stock market is currently at record levels. I still remember at the beginning of the year 2020 when the Dow Jones was very close to 29,000 points, many wondered if it could reach 30,000 points in the future.
After eighteen months of COVID-19 pandemic and great monetary inflation imposed on us by the Fed and the other central banks of the world's major economic powers, the Dow Jones reached an all-time high of 36,565 points on November 8, 2021. As I write this, the Dow is still around 36,000 points:
The problem is the same with the S&P 500 since the entire American stock market is in the middle of a gigantic bubble induced by the ultra-accommodating monetary policy conducted by the Fed for the past 18 months. As a reminder, the Fed has printed more than 35% of all U.S. dollars in circulation during this period, while increasing its Balance Sheet each month by more than $120 billion to exceed $8.5T today.
The S&P 500 which was around 3,200 points at the beginning of 2020 has just touched an ATH of 4,718 points, and no one is laughing anymore when one hypothesizes that it will reach 5,000 points in the coming weeks. Anything seems possible in a market awash in easy money.
However, the beginning of the tapering announced by the Fed in November 2021 leaves investors in doubt. Should we continue to invest in the U.S. stock market when inflation has exceeded 6.2% in October 2021 in America, a first since 1990?
Even if the Fed says that it will keep the key rates at zero until at least mid-2022, there is nothing to say that it will not suddenly change its monetary policy in the face of soaring inflation that is set to last for many more months.
In a sign of a potential change to come, the 10-year US Treasury bond rate is now above 1.6%:
This rise in 10-year US Treasury bond rates is accompanied by another rise: that of the DXY. This index, which measures the strength of the US dollar, has been rising steadily since the beginning of the second half of 2021:
The DXY is just the signal you need to watch to know what to do in the US stock market. Even if the market is in the middle of a tech bubble, that doesn't mean that it will burst tomorrow and that there aren't still significant profits to be made.
When the U.S. dollar strengthens, the U.S. stock market tends to do the same. This has been quite striking since the beginning of the COVID-19 pandemic. While the U.S. stock market had recovered to and slightly exceeded its pre-COVID-19 level by the end of 2020, the subsequent rise accelerated throughout 2021 as the DXY recovered.
This behavior is reversed with that of emerging markets, whose decline accelerated in 2021 since the DXY began to regain strength, and as the S&P 500 soared to new ATH :
Final Thoughts
So the DXY is the signal to watch for to know whether you should go to the US market or the emerging markets.
What is perhaps most interesting is that this behavior is not new. It has been seen in past decades. During the US stock market rally of the late 1990s, the DXY soared from 80 in April 1995 to 118 in October 2000, a jump of +48%.
The DXY had a similar party from mid-2011 to the end of 2016 with a jump of +42% that carried the US stock market at that time as well.
In the coming weeks and months, you will have to closely observe the behavior of the DXY. This will give you an important indication in your thought process whether it is time to leave the US stock market and go to the emerging market, or whether you can continue to hope for a well-performing US stock market.
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