Stocks have been hit hard of late, and ever since the less-than-dulcet talk of Fed “tapering” entered the conversation, we’ve seen a marked selloff in the major domestic, international and emerging market indices. Bonds also have been slammed by the central bank’s proclamation that it would soon pullback the reins on its bond buying program. Even traditional safe haven’s such as gold and silver have made a decided move lower in anticipation of the Fed’s next move.
There is, however, one asset class that’s managed to fall in love with the taper talk, and it is the US dollar.
A reduction later this year, and the eventual end, of quantitative easing is dollar bullish, and that’s exactly what the markets have been telling us. Take a look at the performance, particularly over the past couple of weeks, of the PowerShares US Dollar Bullish Fund (UUP). This fund is pegged to the daily price movement of the US dollar vs. a basket of six rival foreign currencies.
Click to Enlarge As you can see, the dollar staged a sharp rally that’s taken the index back above the 200-day moving average. The fund now sits just below the 50-day average, and a few more bullish trades could send it vaulting back above this short-term resistance.
If we continue to see stocks and bonds selloff, look for more money flows into UUP. Moreover, if we continue to see weakness in the Japanese yen and the euro, that will be yet another factor pushing UUP higher.
So, if you’re looking for a way to ride a sector that could deliver short-term trading gains in a volatile market, then UUP could just be the horse you need to buck the trend. A word to the wise here: if you buy UUP, I recommend setting a relatively tight stop loss at about 5%-8% below your buy price. This will ensure you don’t bet bucked out of the position with any significant portfolio bruising.
At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.