It's shaping up to be another volatile week for the dollar and -- by extension -- for stocks. The market was closed Thursday and booked just a half-day of light trading Friday, meaning traders could have twitchy fingers come Monday's opening bell. And given all that transpired globally over the Thanksgiving weekend, well, the idea of holding risky assets such as stocks could give investors heartburn.
Consider that the ink was barely dry on the European Union's and International Monetary Fund's $110 billion bailout of Ireland when news broke that France, Germany and the EU are concocting a plan to restructure the sovereign debt of some of the other eurozone countries currently on the path to insolvency -- with bondholders left holding part of the bag.
As part of this parade of would-be deadbeats, Portugal found it necessary to assure the bond and credit default swap markets that its funding needs are in fine fettle. Nevermind, that Ireland peddled that same line a week ago and look what good that did. At the same time, across the globe in Asia, North Korea's artillery barrage on a South Korean island has the U.S. and South Korean navies conducting war games in the Yellow Sea. Don't be shocked if stocks slide again as money flows instead to the safety of the dollar.
Moving Mostly Sideways
"It should come as no surprise that with the on-risk trade now switching to the off position, the U.S. dollar is firming appreciably -- the [U.S. Dollar Index] has rallied above its 100-day moving average for the first time this year," David Rosenberg, chief economist and strategist at asset manager Gluskin Sheff, writes in a note to clients.
Perhaps a good Black Friday weekend and strong holiday selling season will draw traders' gaze away from hostilities and financial crises overseas, but then there would be no recent precedent for such a trend to last very long. After all, we've been in a sideways market for a year, with the S&P 500 ($INX) rolling around between a low of 1,022 and a high of 1,255.
"The bottom line is that for the past year, the S&P 500 has crossed above the 1,200 mark five times and has moved below the 1,100 threshold no fewer than 13 times," writes Rosenberg. "Sell at the highs, buy at the lows, until there is a decisive break either way."
Have a look at this 52-week chart of the S&P 500 below. Broadly speaking, U.S. equities were dead money until the early days of September, but here's the real kicker: For for all their trouble and risk, stocks have gained just 7% in the past year.
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