A New Warning About the U.S. Dollar

The dollar is trading back above this level today, but this is concerning. If this level doesn't hold, the dollar could be headed much lower. As our colleague Jeff Clark explained in yesterday's edition of our free Growth Stock Wire e-letter...

This is one of the most vulnerable-looking charts in the market.

If the dollar index can't bounce off the 93 level – or if the bounce is weak and the index rolls back over – the buck will head toward the next support line, which is down around 88.

That's less than a 6% drop from Friday's closing price, which wouldn't be a big deal if we were talking about a stock. But a 6% move in a currency is huge.

That sort of a move would send the prices of precious metals and other commodities much higher. In fact, it is likely the expected breakdown in this U.S. Dollar Index chart that has prompted buying in gold, silver, oil, and agricultural commodities over the past few weeks.

As Jeff noted, a dollar breakdown would be an even bigger tailwind for gold and silver, which have already soared this year.

But while a breakdown looks likely, it may not happen immediately. Here's more from Jeff...

Take a look at this one-year chart...

The index is now about 3% below its 50-day moving average (DMA) line. That's about as far as the dollar usually strays from its 50-DMA before reversing back toward the line. So traders ought to be looking for a short-term bounce in the dollar to get started soon... If that happens, commodity prices are likely to give back some of their recent short-term gains.

Jeff's chart isn't the only reason to believe a short-term dollar rally could be coming...

News service Reuters reports bearish bets on the U.S dollar jumped to three-year highs last week. Data from the U.S. Commodity Futures Trading Commission show net speculative short positions on the dollar rose to $4.2 billion in the week ended April 26. That's the highest level since February 2013... just before the dollar started a multiweek rally.

This bearish extreme in the dollar mirrors the record levels of bullish speculative bets in gold and silver we mentioned last week, and it's one more sign a sharp, short-term reversal is likely.

What should you do with this information?

To be clear, we are NOT turning bearish on gold and silver. We believe this rally has much further to run.

If you've followed our recommendations and put a portion of your portfolio into physical gold and silver and a diversified mix of precious metals investments, you're doing well (Stansberry Gold Investor subscribers are up an average of 21% as of yesterday's close). You can sit tight, knowing you're in a good position to weather any short-term volatility.

On the other hand, if you didn't follow our advice – if, perhaps, you ignored our position-sizing advice, or put your entire portfolio into speculative gold and silver stocks – it's a great time to reassess.

If you're heavily invested in these stocks, you're likely up big over the past several weeks. But remember, gold and silver stocks are much more volatile than the physical metals... As we've seen, when gold and silver rise, they can rise much more. But that also means when gold and silver fall, they can fall much more, too.

For example, gold rallied nearly 20% to start the year. That means it could easily pull back 5% or even 10% in a normal, healthy correction. Gold stocks could pull back even more.

Will you have the stomach to handle that kind of volatility? If you're not sure, consider taking some profits and lightening up until you are.

Again, if you've followed our advice, this is not a reason to sell.

A correction would actually be good news. It would clear out some of the "froth" in the market, and give folks who missed this rally a great second chance to buy. But there are no guarantees we'll see one now.

Despite the evidence in favor of a short-term reversal, it's possible the dollar could head lower right away. This would be an incredibly bearish sign for the dollar, and would push precious metals even higher immediately.

We'll keep you updated on this important trend.

You haven't heard much in the news lately, but the number of energy-related defaults continues to soar.

According to Reuters, 59 oil and gas companies have now declared bankruptcy. This number is quickly approaching a record set following the dot-com bubble... and there are likely many more to come. From Reuters (emphasis added)...

The number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003, according to Reuters data, the law firm Haynes & Boone, and bankruptcydata.com.

Charles Gibbs, a restructuring partner at Akin Gump in Texas, said the U.S. oil industry is not even halfway through its wave of bankruptcies. "I think we'll see more filings in the second quarter than in the first quarter," he said.

In addition, Fitch Ratings reported this week that the default rate in the energy sector has already hit an all-time record of 13%. The prior record was just 9.7% in 1999. Worse, Fitch estimates the default rate could reach 20% or more this year alone.

While the fundamentals continue to deteriorate, high-yield energy debt – along with the rest of the "lions" and "deviants" – has been rallying.

Regular Digest readers know Porter believes this rally was largely driven by short covering and will soon reverse. But he's not alone... and he's in good company...

In a recent interview with Swiss business newspaper Finanz und Wirtschaft, "Bond God" Jeffrey Gundlach – the brilliant founder and CEO of investment firm DoubleLine Capital – said he believes the "easy" rally in junk bonds is over. From the interview (emphasis added)...

I don't see how you are supposed to be fond of high-yield bonds... they are facing enormous fundamental problems. I thought people would learn their lesson [after the financial crisis] but [it's even worse this time].

The leverage in the high-yield bond market is enormous, and you're about to have a substantial increase in defaults. I wouldn't be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high-yield bond market.

Where have we heard that before?

New 52-week highs (as of 5/3/16): Nuveen AMT-Free Municipal Income Fund (NEA), Nuveen Premium Income Municipal Fund 2 (NPM), and Regions Financial – Series B (RF-PB).

Several more subscribers share their thoughts on Dr. Richard Smith's TradeStops program. Send your notes to feedback@stansberryresearch.com. As always, we're prohibited from providing individual advice, but we read every e-mail.

And again, if you'd like to learn how TradeStops could help you make more money with less risk, be sure to join us for our FREE online training event tonight at 8 p.m. Eastern time. Click here to reserve your spot now.

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Regards,

Justin Brill
Baltimore, Maryland
May 4, 2016