Time For A Dollar Rebound?
The monthly jobs report defied expectations last Friday, encouraging those who are looking for a V-shaped recovery. The skeptics pointed to the extreme damage to the economy during the second quarter and the fact that the lagging nature of these results gives us a month-old picture of the economy. The continued impasse in Washington suggests that many political leaders have a distorted view of the health of the economy.
The Friday close was impressive, as most of the averages again rallied in the last hour of trading. The Dow Jones Transportation Average and the iShares Russell 2000, a small-cap ETF, led the way, gaining 5.8% and 6.0% respectively. In a departure from the usual activity, the more narrowly-based Dow Jones Industrial Average outperformed the Nasdaq 100 and S&P 500.
It was another week of strong market internals, as on the NYSE there were 2304 issues advancing and just 772 declining. This has kept the trend of the advance/decline lines positive, which has been the case for most of the summer. That does not mean we will not see minor setbacks or sector rotation over the near term.
The market-leading Invesco QQQ Trust (QQQ) is already up 27.5% YTD according to Morningstar, better than the yearly performance in seven of the last nine years. The daily chart shows that last Monday’s higher open completed the daily trading range (lines a and b).
Though this formation has upside targets in the $280-$284 area, QQQ has already reached the monthly pivot resistance at $274.69 (point c). The daily Nasdaq 100 A/D line made a new all-time high last Thursday, but is now testing support from the long-term trend (line d). A pullback to the 20-day exponential moving average (EMA) at $263.57 or the monthly pivot at $260.89 would not be surprising.
The continued decline in US yields, accompanied by a weak US dollar and sharply higher gold prices, has gotten the market’s attention. The weekly chart of the Dollar Index futures shows that they have been testing the starc- band for the past two weeks (point a). A doji was also formed last week. Those who are familiar with my starc band analysis know that the probabilities of a rebound or at least some sideways trading increase the longer a market trades at or below its weekly starc- band.
The Herrick Payoff Index (HPI) uses volume, open interest, and prices to measure money flow. The HPI dropped below its weighted moving average (WMA) on May 22 (point b) and shows no signs yet of a bottom. The daily indicators (not shown) show some early signs that they may be bottoming.
The possible short-term low in the US dollar is consistent with the very high bullish sentiment in the precious metals, especially gold. I began analyzing gold prices soon after their peak in early 1980, and so have seen a number of up and down cycles.
In a July 18 article, MarketWatch’s Mark Hulbert noted the high level of bullishness of gold market timers among the financial newsletters that he monitors. Extreme levels of bullishness are a contrary indicator that can coincide with a turning point in price. Between when the article was published and last week’s high, the Comex gold futures have rallied over 15%.
Gold futures opened higher Friday and made a new rebound high of $2089.20 before closing at $2029, down $41.40 for the day. The close was below the prior day’s low. As I discussed a few weeks ago, key reversals like this can often be significant. The gold futures also had exceeded the weekly and daily starc+ bands last week as the monthly pivot resistance at $2072 was overcome, putting them into a high-risk buy area.
The daily on-balance-volume (OBV) moved strongly through resistance on July 20, reinforcing my view that sentiment indicators should only be followed when the technical indicators agree. The OBV shows no signs of a top. Even though my favorite gold and silver ETFs, the Spyder Gold Trust (GLD) and iShares Silver Trust (SLV), hit my profit-taking levels for traders last week, I will be looking to buy on a correction.
So what sectors may do best or worst when the dollar is declining? Energy Sector (XLE) was one of the best performing ETFs last week, up 3.2%, and only the Industrial Sector (XLI) and Financial Sector (XLF) did better.
Historically there is a long-term inverse correlation between the US Dollar Index ($USD) and West Texas Crude Oil ($WTIC), as this plot back to 2001 indicates. The dollar plunged from 2001 through 2008 as West Texas Crude Oil prices moved sharply higher. Crude oil declined sharply in 2014 as the dollar rallied.
The correlation is not really that helpful to traders, as these trends often develop and last over a long period of time. However, if the US dollar has formed a significant-top, which I think is the case, then any dollar rebound over the next month or so could be an opportunity to buy the energy stocks or energy ETFs.
Even though the current economic data coming out may not fully reflect the real state of the economy, that does not mean that the reality will not hit in the months ahead. Therefore, while there are no current signs of a stock market top, I do not think this is a time to be complacent, especially as we get closer to September.
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