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The US Dollar Is Poised for a Rally Higher

There’s a wave of new dollars flowing into the economy as we speak. Stimulus checks are hitting American bank accounts, and government spending will almost certainly reach a new high in 2021. Despite all of that, the U.S. dollar has reversed its recent decline and is poised for a rally higher.

By Dr. Steve Sjuggerud, True Wealth

Markets are all about expectations…

There’s a glaring example happening right now.

Washington, D.C. recently passed a massive $1.9 trillion stimulus package. Outside of last year’s COVID relief bill, it’s the largest in our country’s history.

There’s a wave of new dollars flowing into the economy as we speak. Stimulus checks are hitting American bank accounts, and government spending will almost certainly reach a new high in 2021.

Despite all of that, the U.S. dollar has reversed its recent decline and is poised for a rally higher.

How is that possible? It’s simple… Markets are all about expectations.

Let me explain…

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The dollar had been in decline since COVID-19 took center stage last year. It fell double digits from March 2020 to year’s end.

That’s the worst decline we’ve seen in several years. And if more stimulus means more dollars, and more dollars means less value for every buck out there, then most folks would bet the decline was just getting started.

That seems to be dead wrong, though.

Instead, the dollar has turned around since the end of 2020. It’s not up by much, but the trend has reversed. Take a look…

This reversal has been in place for months. And it makes sense…

Joe Biden won the presidential election in November. And it was immediately clear that more stimulus was his primary goal. By the start of 2021, the numbers came into focus. And then… it just became an expectation game.

Markets expected a couple trillion extra dollars floating around. Now that the money has shown up, it’s no big deal. It’s already baked in.

It’s more than that, though. Futures traders have been betting against the dollar at a record level. And that tells me the small move we’ve seen so far could be the start of a larger trend.

The chart below explains it. It shows the Commitment of Traders (“COT”) report for the dollar. By looking at this, we can see what the so-called “dumb money” speculative futures traders believe about the dollar.

When the level is incredibly low, like it is today, it means these folks expect the dollar to fall. But this is a contrarian tool. So when traders all agree, the opposite tends to occur.

That’s the situation for the dollar right now. Take a look…

This is a massive extreme. Futures traders haven’t been this bearish on the dollar in a decade. And as you can see, bottoms in the COT tend to line up with bottoms in the dollar.

It last happened in early 2018, as the dollar began a double-digit rally. And it happened in 2014, just before the dollar jumped by 25%.

Now, we have extremely negative sentiment combined with a slight reversal in the dollar. History tells us this could be the beginning of a major move higher.

This shows the market’s expectation game in action. You’d expect major stimulus to hurt the dollar. But everyone knew it was coming… so much so that bearish bets hit record levels.

You might think this is simply a short-term move. But consider this…

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Interest rates in the U.S. have been on the rise. The 10-year Treasury yield is around 1.65% as I write. That’s up from around 0.5% at the bottom last year.

You might think these rates are laughably low. But in Europe, banks are charging depositors that have large amounts of cash in their accounts. Negative rates have taken over.

If you have a global view and Europe charges you to hold cash, then earning 1.65% in the U.S. doesn’t sound so bad.

Simply put, the dollar is still the best currency in the world once you consider interest rates. And if that holds, it means this reversal in the dollar could last longer than you’d expect.

Is It A Time to Buy Long-Term Bonds?

Bonds are set to outperform over the next year. And that means it’s actually time to buy bonds today.

By Chris Igou, analyst, True Wealth

Stocks are soaring, and interest rates are low… so who wants to own bonds?

I get it. This isn’t a sexy idea. But the time to buy long-term U.S. Treasury Bonds is now.

You see, bonds have taken a beating this year…

While the Nasdaq and S&P 500 are up 3% and 5%, respectively, a basket of long-term bonds is down 13%.

Importantly, the recent collapse led to a new 52-week low. Normally, we might expect this to mean more pain is ahead for bonds. But history shows that’s not the case…

Bonds are set to outperform over the next year. And that means it’s actually time to buy bonds today.

Let me explain…

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Bonds are never exciting. And these days, with the Melt Up driving stocks to new highs, they’re even less attractive. But that wasn’t the case a year ago.

The iShares 20+ Year Treasury Bond Fund (TLT) holds a basket of long-term Treasury bonds. And it thrived during the early days of the pandemic.

TLT was up 14% while U.S. stocks were down 34% from February 19 to March 23, 2020. These safe bonds were what everyone wanted to own as COVID-19 took the global stage and spooked investors.

Now, things have changed. With vaccines rolling out and potential normalcy returning in 2021, TLT is crashing.

Investors are bidding up stocks and bailing on safety plays like bonds. Interest rates have been rising, and that has crushed bond prices.

This major shift has sent TLT to its lowest level in years. Check it out…

The recent fall has wiped out all of TLT’s early 2020 gains. Again, the fund is down double digits this year. But history shows the downturn is almost over…

Since 1990, hitting a new 52-week low has signaled a turning point for bonds. And it could mean outperformance over the next year. Take a look…

TLT has returned 2.7% in a typical year since 2002. That’s what you would expect from a boring bond fund. But by buying after TLT hits a 52-week low, you could have locked in much stronger returns…

Buying after similar setups has led to 2.5% gains in six months and a 5.1% gain over the next year. While those aren’t huge numbers, it’s much better than a buy-and-hold strategy.

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Now, bonds are still in a downtrend. Prices have only begun to level off. But given how bad the fall has been, it’s possible we’ve already seen the bottom. And shares of TLT are the easiest way to take advantage of it.

I know it’s not exciting. But history shows the recent bloodbath in bonds could be over soon. And when the trend turns, bonds – and shares of TLT – are likely to outperform.

Japan Stock Market is Set To Outperform The U.S.

If you’re interested in putting money to work outside the U.S., Japan is a place to consider today.

By Chris Igou, analyst, True Wealth

I know you won’t want to hear today’s message…

The Melt Up is driving U.S. stocks to incredible heights. But there’s another market, on the other side of the world, that’s primed to outperform the U.S.

The idea of putting money to work outside the U.S. at a time like this probably seems crazy. But it’s actually a smart bet, as I’ll share today.

That’s because Japanese stocks are coming off a rare setup. They recently traded for one of their largest discounts to U.S. stocks on record. And they’re still trading at a 61% discount today.

A valuation gap this wide has only happened a handful of times over the last two decades. Each time was a bullish sign for Japanese stocks.

And it means that Japan’s market is set to outperform the U.S. from here.

Let me explain…

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The price-to-sales (P/S) ratio is one of the simplest valuation measures. That’s because it only has two inputs… the price of the stock and the amount of revenue it brings in.

Don’t be fooled by that simplicity, though. The P/S ratio does a good job at telling us how expensive or cheap a market is. And it can be incredibly effective at highlighting valuation anomalies.

We recently hit one of those anomalies between the U.S. and Japan. The current U.S. P/S ratio is 2.94, while Japan’s P/S ratio is 1.15. That’s a 61% discount.

While the gap has been slightly wider in recent months, this discount is still near record levels. You can see how rare it has been over the past 20 years. Take a look…

When this discount has gotten deeper than 60%, it has often flagged buying opportunities for Japanese stocks. Let’s quickly take a look at a few examples over the past 20 years…

In early 2002, this valuation gap hit its widest spread on record. Japanese stocks traded near an 80% discount to their U.S. peers. Then, the gap started to close… And Japan’s market started to outperform the U.S.

Japanese stocks were up 93% from January 2002 until mid-July 2007. Meanwhile, the S&P 500 was up just 51% over the same period.

That’s not the only time we’ve seen a major move like this, either…

Japan’s market rallied 152% from October 2012 until mid-2015. Meanwhile, the U.S. was up just 56%. This was on the heels of another huge valuation gap where Japan’s market traded for a 65%-plus discount to the U.S.

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The last example came in 2016. The discount reached 65% in July of that year. Japan’s market rallied 53% into October 2018. The S&P 500 was up just 41%.

These kinds of setups have happened before years of outperformance in Japanese stocks. And while this ratio technically bottomed back in late 2020, we are still seeing crazy levels between these markets today.

If you’re interested in taking advantage of this setup, you can do it easily with the iShares MSCI Japan Fund (EWJ). This simple fund tracks the overall Japanese market.

If you’re interested in putting money to work outside the U.S., Japan is a place to consider today. And shares of EWJ are an easy way to take advantage of it.

Consumer Staples Sector Is With Double-Digit Upside Potential

Consumer Staples Sector sector holds companies like Procter & Gamble, Walmart, and Coca-Cola. They’re great businesses, no doubt. But it’s not the most exciting area of the market.

By Chris Igou, analyst, True Wealth

Several U.S. sectors have taken a dive in recent weeks…

The Nasdaq entered a correction earlier this month. A number of other stocks have taken a beating. But one specific sector’s pullback has gone too far.

You see, this sector fell sharply to end February. It hit oversold levels for the first time since March 2020.

Now, it’s starting to bounce back. So while this is typically a boring sector, history says if you buy now – given the setup in place – you could earn double-digit profits.

Let me explain…

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When a stock moves too far, too fast in a given direction, a bounce back is likely. That’s why we call the situation “oversold.”

These signals work as lines in the sand to see when a stock has gotten ahead of itself. And they highlight potential buying opportunities. We can use the relative strength index (“RSI”) to see this at work…

When a stock falls below and rises back above an RSI of 30 – triggering oversold levels – a snapback in the other direction is likely.

That’s exactly what we are seeing in the boring consumer staples sector today.

This sector holds companies like Procter & Gamble, Walmart, and Coca-Cola. They’re great businesses, no doubt. But it’s not the most exciting area of the market.

That doesn’t matter though. The Consumer Staples Select Sector SPDR Fund (XLP) recently hit oversold territory. Take a look…

The new signal triggered on March 1. It was an extremely rare move – setups like this have happened just 1% of the time since 1999.

Plus, it marks a buying opportunity for investors. Similar setups have led to significant outperformance over the next year. Check it out…

XLP has returned roughly 4% in a typical year since its inception in 1999. That’s not a sexy return in the grand scheme of things. But buying after an instance like today’s turns out much better…

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Similar oversold cases have led to more than 3% gains in three months, 5% gains in six months, and roughly a 10% gain over the next year.

That’s much better than a simple buy-and-hold strategy. And it means this boring sector has a chance of delivering double-digit gains.

XLP has already reversed course since the start of the month. But there’s still plenty of upside potential left over the next year.

You might think of these as boring companies… But buying them at the right time can mean solid profits. That time is now. History shows XLP is a good opportunity today.

Australian Stocks: Gains of 20%-plus Are Possible Over The Next Year

Australian stocks: It’s a market few investors consider. You probably haven’t thought much about it either. But it’s set up for big gains right now.

By Chris Igou, analyst, True Wealth

Investors don’t seem to care. That probably includes you.

Certain areas of the world don’t seem like exciting places to invest. And that makes noticing what’s going on – and putting money to work – a tough hill to climb.

In the case I’ll share today, that’s a big mistake.

You see, it’s not just a case of ignoring. Investors are fleeing this market in a big way…

It’s not a market you’ll read about often. But with sentiment hitting crazy levels, it’s a place you need to consider right now.

History shows us that gains of 20%-plus are possible over the next year. And there’s a simple way you can take advantage of it.

Let me explain…

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I’m talking about Australian stocks.

Again, it’s a market few investors consider. You probably haven’t thought much about it either. But it’s set up for big gains right now.

That’s because investors have been getting out of Australian stocks.

We can see it through shares outstanding for the iShares MSCI Australia Fund (EWA). EWA holds more than 60 stocks from sectors all over Australia’s market. So it’s a good benchmark to gauge returns.

What’s even more important about EWA is that it’s able to create and liquidate shares based on investor demand…

When investors are clamoring to buy Australian stocks, EWA simply creates more shares to meet demand. And when demand is dwindling, EWA cuts the total number of shares.

This can give us a good idea of how investors feel about a certain market. And today, EWA’s shares outstanding are near multiyear lows. Check it out…

You can see that investor demand has crashed in recent weeks. And it’s down big over the last decade.

The chart also shows similar setups happening in 2014, 2015, 2019, and early 2020. Each of these cases led to a short-term jump in Australian stocks. Let’s start in 2014…

EWA’s shares outstanding had been falling for years before bottoming in March 2014. That extreme negative sentiment was a sign of a short-term opportunity. From March 2014 to early September that year, EWA rallied 12%.

We saw a similar story play out in late 2015. EWA’s share count bottomed in August 2015. It was a glaring buy signal for contrarian investors. And a year later, EWA was up 21%.

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The 2019 and 2020 instances were no exception. Shares outstanding bottomed in March 2019. EWA went on to rally 14% into January 2020.

The 2020 setup came during the depths of the pullback in March 2020. Shares outstanding bottomed right around the same time EWA did. Then, EWA really took off… rallying 91% to end the year.

Again, EWA’s shares outstanding have crashed in recent weeks. Investors are giving up on this market. And that’s setting up a buying opportunity for contrarian investors.

History says we could easily see 20%-plus gains in the coming months. And you have a simple way to take advantage of it through EWA.

The rest of the world is ignoring this opportunity. But that’s a mistake. It’s a smart contrarian bet… one that you should at least consider today.