US Dollar Showing Strength

US Dollar Showing Strength

Posted on July 01, 2019

Market State 1- Bullish: The US stock market, which we measure using the S&P 500, remains in Market State 1. Market State 1 is the first of the 5 bullish Market States. MS 1 can be prone to pullbacks, since most new highs occur in Market State 1. The S&P 500 is sitting near a new high, around the 2950 level. It has tested this area twice before (October 2018 and late April) but failed to break out. In Market State 1, long-term indicators are positive; volatility is low/decreasing; and short-term supply & demand indicators are positive.

Canterbury Volatility Index (CVI)- CVI 61: Volatility, as measured by the Canterbury Volatility Index, continues its downward trend. Low/decreasing CVI is a bullish characteristic. This downward trend began in early June, following a volatility spike and a pullback in the month of May. Shorter-term CVI is also decreasing. When volatility becomes extremely low (less than CVI 45), the market can be prone to having one or two “outlier” days of about 1.5% or more. Extreme low volatility is like the compression of a spring, eventually a spike will occur. Back in late April, the market was right at the zone of putting in a new high, but short-term volatility (10-day CVI) was in extreme low territory. A spike then occurred in May, resulting in a minor pullback. Short-term volatility currently sits at CVI 45, which is entering that extreme low territory.

Comment In recent updates, we have discussed the fact that the US markets have been incredibly strong compared to foreign markets. This is in part due to the strength of the US dollar. Looking at current Canterbury VWRS rankings (a risk-adjusted strength measurement), the dollar is ranked very highly among global currencies:



The chart below compares the S&P 500 (US market) to both Emerging Markets and the EAFE (Developed markets- Europe, Australia, Far East). For most of this timeframe, the US stock market has been much stronger than its foreign counterparts. This is especially true starting May of 2018. While US Markets were rising, these foreign indexes were falling. Then, when the US market began falling, these foreign markets continued declining.



If we look at a basket of currencies, we will see that the US dollar hit a low value in mid-February 2018, while the other currencies shown hit a high. The dollar began increasing, while the other currencies began falling off. The chart below shows the US Dollar, Australian Dollar, Euro, Krona, and British Pound. I drew blue trend lines over the US Dollar to more clearly see its directional movement. A strong US Dollar has correlated to a stronger US stock market compared to foreign indexes.



Investing is a Lifetime Endeavor Since the creation of Exchange-Traded-Funds, we can now invest in virtually any asset class or security imaginable. We can invest in any bond (treasuries, foreign government, junk, corporate, preferred), any commodity (gold, silver, copper, coffee), any equity (US and abroad), or even inverse funds. These securities all have the benefits and drawbacks of liquidity. The price for liquidity is that all liquid-traded securities will have both bull and bear markets. There will be a time when owning foreign securities will be more advantageous than owning US securities. There will also be times when small-cap growth is more conservative than treasury bonds. There is a time to own the US dollar and a time to own the Swedish Krona. We can rotate in and out of any asset class—that is the advantage of liquidity. We can successfully identify securities exhibiting low-risk bull market characteristics versus securities that are in higher risk bear/transitional markets. If we do not use the liquidity (in other words, we simply buy and hold a fixed allocation), then that liquidity becomes a disadvantage, and investor portfolios will be exposed to highly volatile bear markets.

Bottom Line The stock market remains near a high, and in Market State 1. Volatility (CVI) is low/decreasing. Something to be aware of is that short-term volatility (10-day CVI) is entering extreme low territory. This, coupled with the market being near a new high, could lead to some outlier days that result in a pullback (we saw something similar in the month of May). The US stock market has been strong compared to foreign stock markets. This is partially due to a rising dollar versus other currencies. This trend will not continue forever. Every dog will have its day. There will come a time when foreign markets are more attractive than domestic ones. The key advantage investors have for keeping an efficient portfolio is liquidity. Markets assume we know the difference between bulls and bears. That is why Canterbury employs an Adaptive Portfolio Strategy to maintain an efficient portfolio. The Canterbury Portfolio Thermostat can rotate to any asset class or security that is exhibiting the right low-risk characteristics. Adapting to various market environments requires a comprehensive system-- one that can manage liquidity.

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.


Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.