Morning Comment: The Dollar Stands at a Key Technical Juncture

There is no question that the stock market continues to act will, but there is also no question that investor enthusiasm is waning as we approach the an all-time high in the S&P 500 Index. This lack of enthusiasm could easily just be a short-term phenomenon...but looking at the “internals” of the market, investors seem to be moving to the sidelines so that they can figure out whether the market can thrust higher once the S&P finally makes a new high. It’s hard to blame investors about being a bit nervous right now...given that the stock market has risen more than 50% in less than 5 months...and that the market has become quite expensive (at more than 20x 2021 earnings estimates).

So why are we saying that investors seem to be moving to the sidelines...and that the “internals” are not very good? First of all, volume has fallen dramatically over the past week (as the S&P has moved closer to its February highs). Over the past four trading days, the composite volume has averaged just 2.6bn shares...which is down 30% from its 3-month average. We’d also note that the volume in the QQQ’s yesterday was 50% lower than the average volume for this year. (It was also 35% below the average daily volume over the past four months.) Since the mega-cap tech names that have been so important to the rally off the March lows are so important to the QQQ’s, the drop in volume in this ETF on a day when it rallied over 1% is a signal that investor enthusiasm in waning a bit right now.

As for other aspects of the “internals,” the breadth during yesterday’s rally was quite poor. It was actually slightly negative for the S&P 500 and the NYSE Composite Index...and only very slightly positive on the Nasdaq Composite! When the breadth (the difference between advancing stocks vs. declining stock) is barely positive on a day when an index has rallied a full 1.0%...is not a good reading at all. Even the 2.3 to 1 positive reading for the NDX Nasdaq 100 was quite disappointing (given that the NDX index 1.1%).

Of course, the rally has been a low-volume one with lousy breadth for a while now, but these numbers are even worse than they had been earlier this summer, so the loss of enthusiasm as the S&P has approached its February highs is another reason why were are very nervous about the short-term potential for the stock market...even though we’ve become more constructive on the intermediate-term potential for stocks (later this year).

We actually believe that the action in the dollar over the rest of this month will be more important than the action in the S&P 500 Index. After a short-term bounce two weeks ago, the DXY dollar index has rolled back over...and this morning it is testing its intraday lows from late July and early August (at the 92.50 level). Therefore, if it breaks below that level in any significant way...thus giving it another key “lower-low,” it’s going to confirm that another leg lower for the greenback has begun.

HOWEVER, we also have to note that the DXY is becoming quite oversold on an intermediate-term basis. Looking at its weekly RSI chart, it is approaching the same extremes that we saw in 2017 and 2018...just before the dollar began multi-month bounces. Therefore, if the dollar can hold its recent lows...and can bounce strongly from its current oversold condition...it could lead to a very surprising rally that will catch a lot of investors offsides.

Also, as Bloomberg reported yesterday, hedge funds are short the dollar for the first time in two years. On top of this, we’d note that the euro...which has the largest weighting in the DXY index (by far)...is becoming very overbought. However, the development that is most surprising is that the euro has become “over-owned!” The COT data shows that the dumb money speculators (“specs”) now have a record long position in the euro. In fact, their net position is more than 30% larger than it was in early 2018...just before the euro began a 22 month decline! Therefore, there are A LOT of people are now on one side of the boat in the currency market. They’re short the dollar and long the euro, so there doesn’t seem to be a lot of people left to push the dollar lower...or the euro higher.

In other words, “positioning” and the technical situation in the currency markets right now....make the odds of a surprising reversal in the currency markets over the coming weeks a much more distinct possibility than the vast majority of investors realize right now. Therefore, as we all continue to watch how things playout in the fiscal-plan negotiations...in the political conventions...in the tensions between the U.S. and China...we should also still keep a VERY close eye on the currency markets. Their next move may not playout the way most people think they will. If that’s the case, it could create a big jump in volatility in many different markets!






Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Aug 18, 2020 — 9:08 AM
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