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Wednesday Equities Review

A few quick tips:

  • My work here is to educate on short and long term signals – on which direction the market is generally headed based on academic indicators
  • These signals can help develop an investment strategy – they are not the only elements you should factor into your thesis
    • I will share my investment strategy for you to compare, but it should not be a playbook for your investments – consult with a financial advisor for that
  • Two major catalysts I look for when trading equities are volatility and dollar strength
    • The VIX (Volatility Index on the S&P 500)
    • DXY (Dollar Strength Index)
  • These two elements, on a broader scale, usually signal which direction equities are headed
  • Today we’re focusing on the DXY

The Dollar Strength Index

  • There is an inverse relationship between the strength of the dollar vs. S&P 500 price
  • The DXY is almost exclusively driven by interest rates
  • The Federal Reserve:
    • The strength of the dollar goes UP each time the Fed RAISES interest rates
    • The strength of the dollar goes DOWN each time the Fed LOWERS interest rates
  • The DXY going UP is a signal that it’s better to hold cash (dry powder) than it is to hold equities
  • If Jerome Powell and the Federal Reserve are adamant about lowering inflation, then we can be almost certain that the DXY will continue its parabolic run up
    • September core inflation went up and overall inflation is still hovering above 8%
    • We can safely assume there will be another interest rate hike in November anywhere between 75-100bps
    • Which means the DXY will likely go UP
    • Which means the S&P 500 will likely go DOWN into the first week of November

My Strategy

  • I’m continuing to hold majority cash positions until the Fed switches to Quantitative Easing
    • Either they stop raising rates entirely or they begin to decrease rates
  • For me, asset prices are cheap now. I’m spread across commodities, tech, metals, and industrial stocks with 50% of my positions planned to go into the $SPY
  • Dollar Cost Averaging is my strategy of choice
    • I split my investment fund into 5 “rounds” (say I have $100k to invest, each round is $20k I will throw into the market at a specific time)
      • Round No. 1: in the market right now at the price levels we’re seeing at this moment
      • Round No. 2: will go in at the next major dip likely in the next couple weeks
      • Rounds 3 through 4 will stay in cash positions until the Fed moves to QE or we hear more dovish rhetoric from Jerome Powell
      • If there aren’t any major dips in the market, the remaining “Rounds” will ride the moves up and grow my money

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Your investment strategies could differ from mine based on your risk tolerances, research, and time horizon, so I encourage you to do your own research as information provided by The Rebel Economist or Breaking Metrics should never be considered financial advice.

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