Editor's note: This uptrend could be over soon... The U.S. dollar has maintained its status as the world's reserve currency amid today's uncertain market, prompting many investors to explore foreign currencies. The euro has been soaring as a result. But history shows when folks pile into an asset, a decline is bound to happen... That's why Brett Eversole – senior analyst of True Wealth – says it's critical for investors to understand how past currency rallies have played out before the turnaround starts... In today's Masters Series, originally from the January 11 edition of the True Wealth Systems Review of Market Extremes, Brett discusses extreme sentiment in the euro taking place right now... explains what last year's huge market downturn could mean for stocks moving forward... and reveals why we could be nearing the end of the downtrend in the housing market...
This Major Currency Rally Is About to End By Brett Eversole, senior analyst, True Wealth The most important financial shift at the end of 2022 had nothing to do with stocks or bonds... It was the change in the trend of the U.S. dollar. The dollar had been soaring for most of 2022... Then, it peaked in late September and fell nearly 10% to end the year. The rise and fall of the dollar impacts just about every financial asset. Most of all, though, it means big changes for other global currencies. And that's exactly what we've been seeing. When the dollar was soaring, global currencies were crashing. Now, they're on the rise again. But one major currency might be near the end of its rally. Investors have already gone "all in" on it. And history shows a slowdown – or even a reversal – is likely as a result. Let me explain...
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The dollar is still the king of currencies. It's the global reserve currency and the most important for worldwide trade. But it isn't the only currency that matters... The clear No. 2 on the list is the euro. It bottomed in late September, just as the dollar peaked. And the euro has jumped 11% since then. Those kinds of moves don't happen often. Major currencies like the dollar and euro generally move at a glacial pace. No one would bat an eye over an 11% move over a couple of years... But to see it in only a few months is rare. Traders have taken notice, too. They see the euro soaring, and they're jumping on the bandwagon. Unfortunately, the euro might be too loved to keep moving higher. We can see that by looking at the Commitment of Traders ("COT") report for the euro. This weekly report shows what futures traders are doing with their money. And when these folks get overly bullish, the smart move for contrarians like us is to take the opposite bet. That's the setup in the euro right now. Take a look... 
A multiyear high like this means that futures traders are all betting that the euro will rally. The problem is, when they all crowd in on a trade, their timing is terrible... They tend to pile into an asset after it soars. That's why these big sentiment peaks tend to happen shortly before major declines. We've seen three similar setups in the euro over the past decade... The most recent was in late 2020. The COT spiked to an all-time high as the euro surged. The currency managed to rally for a few more months after that. But then, it began a nearly two-year-long downturn, dropping more than 20% along the way. A similar tale played out in 2018. The euro had been rallying, and the COT jumped to an extreme. That kicked off a two-year slump for the currency – a decline of around 15%. Finally, we'll look at the sentiment peak in 2013. It was the same story of futures traders chasing performance. The euro rallied for a few months after the COT hit an extreme. But then, the currency plummeted roughly 25% over the next year. Today, a similar setup is underway. The euro crashed for most of 2022. But its double-digit rise in recent months has caught the eye of futures traders. And they have gotten extremely bullish as a result. History shows the currency could rally for a while longer. But it also shows most of the gains have likely already happened. And there's a good chance the euro will be lower in a year than it is today. But that's not the only shift taking place in the markets right now. Another is happening in housing... Rising interest rates put the brakes on all kinds of sectors. And one of the largest slowdowns happened in the housing market. In 2020 and 2021, you could hardly list a house before it sold. Receiving dozens of bids above the asking price became the norm. And prices skyrocketed around the country. But then, inflation reared its head... the Federal Reserve began hiking rates... mortgage rates more than doubled... and the red-hot housing market came to a screeching halt. Things could be changing now, though. That's because the slowdown has reached an extreme. And it means the worst of the housing decline is likely behind us... Rapidly rising mortgage rates are a recipe for a housing slump. Most folks still buy with a mortgage. And when mortgage rates soar, housing affordability drops. Last year's rising rates led to the typical monthly mortgage payment becoming 35% to 40% more expensive. (And that's with prices going nowhere.) So, of course, demand cratered. However, the decline has become extreme. You can see it in the Pending Home Sales Index ("PHS") chart below. Take a look... 
The PHS comes from the National Association of Realtors, the industry's premier data provider. The index looks at sales activity to determine the trends in the market. Also, the PHS is a leading indicator, often signaling where existing-home sales will go in the months that follow. The reading of 73.9 in November is the second lowest in history. Only the pandemic bottom's reading was lower. And longtime subscribers know today's extreme is a strong contrarian indicator. We can see it in history... The PHS hit a high in 2005 – just before the housing market collapsed. It plummeted as housing prices fell. And then, it bottomed in 2010 – at nearly the same time as the housing market. That was an opportune time to put money to work in real estate... and so was the next major bottom in 2020. The housing rally that followed that pandemic low was one of the greatest on record. Now, housing is slowing again. And the PHS is still near its second-lowest level ever. That doesn't mean the housing slump is over. But it does mean we're getting close to that point. The long-term fundamentals are in favor of higher home prices. We still need millions more homes than we have. And that supply-and-demand imbalance is a massive tailwind. If mortgage rates fall, housing activity will likely pick back up in a hurry. And higher prices will surely follow. We're nearing that point. So don't bet on a long-term housing bust. Good investing, Brett Eversole
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