Note
I'll be traveling and on vacation this week, so my blog articles will focus on very brief topics regarding current market themes or my own trading strategies. I'll return to my "normal" blog postings regarding market action, outlook, historical tendencies, etc. when I return on Monday, August 20th.
Tuesday, August 14th
Yesterday, I wrote about the recent breakout in the U.S. Dollar Index ($USD). I'd like to take that a step further today. The USD rose sharply off the January through March lows and with it was a surge in small cap stocks vs. their larger cap counterparts. During the USD consolidation that took place over the past 2-3 months, we saw small caps pull back on a relative basis. Now that the USD has broken out again, you can already see the relative strength in small caps returning:
Although the USD did consolidate for those 2-3 months, it did so in very bullish ascending triangle fashion. Those patterns typically result in a breakout to the upside and that's exactly what we've seen. Furthermore, the 10 year U.S. treasury yield ($UST10Y) continues to push higher relative to the 10 year German treasury yield ($DET10Y). That normally is accompanied by a rising dollar.
If I'm right and the dollar resumes its uptrend and eventually nears the earlier 2018 high, then trading/investing in the small cap world will likely result in relative outperformance vs. the benchmark S&P 500 and that's what I strive to do - outperform the S&P 500.
Happy trading!
Tom
