Stocks Enter Holidays With Cheer, as Bitcoin, Gold Put on Naughty List
Let's chart what's happening and see why the buck is partly to blame, and look at stocks like SoFi, Home Depot and more.
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Stocks are entering what should be one of the best periods of the year, but bitcoin and gold are taking a sudden hit.
Let's chart out what's happening for answers to why and clues as to what's ahead.
First, look at the chart below: The Dow Jones industrial average (left) and the Russell 2000 (right) closed on Monday at all-time highs. Both indexes are leaning on their respective 50-day moving averages (blue) for support:
The Russell 2000 is one of the beneficiaries of a strong U.S. dollar. On Friday, the U.S. Dollar Index touched 108 (red arrow) before pulling back, briefly reaching a 52-week high.
The greenback’s 50-day moving average (blue) is quickly rising toward its 200-day moving average (red). Both moving averages are rising, creating the possibility of a golden cross (shaded yellow).
A strong dollar will impact the earnings of larger companies, which tend to do a significant portion of their business overseas. Revenues that are earned in euros, British pounds, or Japanese yen will seem less impressive when those weak currencies are exchanged for dollars.
Perhaps that’s why the move in the Dow isn’t being led by the usual suspects, such as Apple AAPL or Microsoft MSFT. Large-cap tech appears to be taking a back seat for the moment.
Instead, names like American Express AXP, left, and Home Depot HD, right, are leading the venerable Dow Jones index higher. Both names closed at all-time highs on Monday.
Home Depot is a good example of a dominant brand in the U.S. that has little presence outside of North America. While Home Depot does have some exposure to the Canadian dollar and Mexican peso, about 90% of the company’s earnings are in U.S. dollars.
Strength in the dollar could also be behind the pullbacks in gold (left) and bitcoin (right).
On Friday, our gold trading plan achieved its final target of $2,680, as described here. On Monday, after exiting the trade, gold suffered its worst single-day decline in over three years.
Meanwhile, bitcoin has dropped from $99,800 to $92,100 in less than a week. Bitcoin longs are unlikely to be discouraged by this decline, as the digital currency has gained about 70% since early September.
The S&P 500 (left) and the Nasdaq 100 (right) are trading slightly below their all-time highs, which were reached earlier this month. Momentum alone could carry these indexes to new highs.
While the mega-cap names have recently slowed their ascent, other tech-oriented names like Spotify SPOT (market cap $96.6 billion) and SoFi Technologies SOFI ($17 billion) closed at 52-week highs on Monday. We remain long both names.
Bottom Line
The major indexes are trending higher, and are aligned with positive seasonality as we've entered the most favorable time of the year to own stocks. Meanwhile, gold and Bitcoin face a tougher road ahead, due to the strong greenback.
Next time, we'll look at reasons why the above trends are likely to continue.
At the time of publication, Ponsi was long AAPL, SPOT, SOFI.
