SPX, GLD, DIA All on the Rise

As the dollar continues to weaken, stocks and commodities are on the rise.  From an equity and option trader’s perspective, Dollar Weakness = Market Bullish at least for the time being…

In a weak dollar environment, U.S. goods (exports) become comparatively cheaper for foreigners to buy, so U.S. companies that are large enough and have the ability to sell these goods to buyers around the world stand to benefit.  In turn, U.S. companies end up selling more goods overseas and thus improving their earnings picture and rewarding their common stock.  This process can be complicated by several factors such as where the company has factories, its labor force, etc. 

The weak dollar will also obviously cause foreign goods to become more expensive here in the U.S.- this would put a damper on imports.  Being that the U.S. is the “world’s consumer”, discouraging its purchase of goods from other countries may not be in their best interest either (as long as the US continues to consume).

This is a delicate balance, that, frankly, I try to not spend too much time on, because finding the right answer, in my opinion, is impossible because most solutions have their shortcomings. Also, as the world evolves and political processes, beliefs, energy solutions (that’s the big one) and global economies shift, this will be an everlasting argument that always be sure to spark debate. 

When it comes to the dollar, most Americans I believe, should favor strength for obvious reasons. 

Low borrowing rates mean low savings rates for Americans, with a weak dollar. Americans, in turn, will be saving less because they are spending more on food and goods as well as earning less both in interest as well as the actual value of their savings.  This will force many to take more risk in investments, which could have catastrophic monetary and psychological consequences if those investments don’t pay off or lose value.  Think about the ramifications of another huge wave of Americans defaulting on their mortgage and debt obligations.  Our savings rate, even though it has risen as of late, is still dangerously low.

The government also has quite a bit of debt to service; a weak dollar wouldn’t benefit the boys in Washington either.

But, I digress…

We have to play the hands we are dealt and exploit the situation before us and the fact of the matter is that between materials, industrials and energy you have almost 30% of the S&P 500. These sectors will benefit the most from a rise in commodities stemming from a weaker dollar.  Gold and oil have historically been a hedge for a weak dollar and/or inflation because of their global usage and dollar denominated value.  The FED has indicated that it will be some time before rates begin to rise again and if the world continues to claw out of the “global recession,” demand for both these commodities will continue to rise.  I would remain long both, but reduce most exposure to out-of-the-money put spreads as there may be pullbacks along the way.