Among all the uncertainties last year, there was one theme that played out almost all year long. The U.S. dollar couldn’t find find footing, which had a levitating effect on several segments on Wall Street. A weak dollar favors domestic corporations who have exports. Those U.S. stocks have blossomed, since with a lower dollar, foreign countries can then better afford our exports.
The collapse in the U.S. currency also opened the door for prosperity in all commodities that are priced in it. Case in point, oil and copper are up 90% since the March-April lows.
Two other themes also emerged from this weakness. Gold finally broke its own record that has been standing since 2011. But the clear winner by far was Bitcoin, which rallied 1,000% from the depth of the pandemic correction. It is correcting a bit in the past couple days, but the rally was enormous.
Clearly this weakness in dollars cannot continue for ever and if it does then we will have bigger problems. The assumption today is that this year, and perhaps starting soon, the trend will start to reverse.
The dollar should start to find footing and the chain of events could unravel. Investors who hang on to the theme a bit too long or come into it late will suffer. Below, we discuss one precarious situation where investors should leave. Then we will offer a similar ticker to hide in if necessary. Thirdly we will offer a swing trade that could be the surprise of the year.
The three tickers for today are:
- Deere (NYSE:DE): This is the one with the warning.
- 3M Company (NYSE:MMM): This is the alternative.
- Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP): The surprise opportunity of 2021
U.S. Stocks to Trade: Deere (DE)
DE stock is the star of the show today. It’s up 65% in a year and 85% in six months. It won’t be a disaster or a surprise if it loses a little bit of steam. That’s not to say it’s a short. The chart has gone parabolic and is vulnerable to corrections. We’ve seen stocks ramp like this before — Tesla (NASDAQ:TSLA), to name one. But Deere isn’t typically volatile.
Perhaps the U.S. election results had something to do with the exuberance for it on Wall Street. Or there is also the expectations of higher farming exports. What ever it is, I fail to see most of it.
First of all, the global economy is in worse shape now that in the summer of last year. The U.S. is spending trillions, but overseas, most poorer countries are starving. Not all governments are able to baby their citizens like we do here. The point is that we don’t yet have a booming economy. This is the desperate effort to claw our way of our a gigantic crater in which we jumped. As for DE stock fundamentals they are solid but that is my point.
The way Wall Street prices it, Deere is not a growth stock, so its price shouldn’t be explosive. Proof of this is its price-to-sales is under 3. That’s not a lot of credit and for good reason. Since 2017, its net income barely rose, yet its market capitalization has doubled. Definitely warning signs and leaves it vulnerable to sharp pullbacks.
Those long the stock should be leery of their positions. Having some protection here is most definitely a good idea. I would not even think about buying shares until it revisits prior breakout lines. The first of those is near $270 per share. The better levels for my taste would be closer to $250 or lower.
3M is a good ole American company that’s been doing great things for 119 years. Clearly the comments today won’t amount to much over the long haul. During the depths of the pandemic panic I wrote an article that it was safe to own MMM stock. Although I didn’t nail the absolute bottom, it rallied 20% from there and is still 15% green.
Unlike DE stock, the ascent here is more tapered. I don’t see the precarious risk that is clearly visible there.
The chart is a gentle ascending channel, and the opportunity today is that price is near its lower edge. Odds are that the machines will buy the dip and try to swing trade it to $176 per share. There is the potential for slightly more downside, but support should be strong as it nears $158.
Setting stop losses is an important step for traders whereas investors don’t care as much. In this case, there is the possibility of a market-wide hiccup that could cause a dip to $149 per share. Either way, these are entry points that are not likely to be financial disasters in the long run.
3M is not exciting to watch and that’s why it has a P/E under 20 and a P/S of around 3. In addition, the investors get to enjoy a yield over 3%.
I am noting the differential as an opportunity to roll out of DE and into MMM for a safer bet into February. This is the time of year when big themes develop. And it’s not usually the incumbent that renews. Meaning that what was going on is not likely to continue.
Invesco DB US Dollar Index Bullish Fund (UUP)
There is a lack of respect for the dollar of late, and that’s not good in the long run. For now, our domestic corporations are reaping the rewards but there are longer term implications. The world will not tolerate pricing commodities using a currency in free-fall. There will need to be a reversal of the trend, and soon. This won’t likely be a moment in time but rather a process.
The first order of business is for the U.S. dollar to snap out of its descending channel.
Part of the problem is the talks of stimulus packages. I think we are too lax discussing the amounts. I remember when in 2008 they mentioned the $750 billion T.A.R.P. (Troubled Asset Relief Program), jaws dropped. All said and done, they did the job with only $450 billion. This time, the warm up amount was in the trillions.
Most recently the people were disappointed with an additional trillion. I am shocked as to how little value we hold in the our precious dollar. And therein lies the problem.
Clearly we are devaluing currencies around the world and that’s why alternative vehicles are gaining popularity. It’s not a coincidence that this is the year of Bitcoin, when governments are breaking records with helicopter money. This will have to stop soon and the frenzy grab for dollar alternative will abate.
To trade this I want to be long the UUP. My experience tells me that I should use options, but not with a spread. The only way I’ve had success in the past is by buying calls way out in time and at current price. Going too high up the options chain often results in disappointments.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.