Talking Points:
- Risk trends have steadied with the major US indices at overt trendline support, but the FANG's slide may threaten holiday liquidity
- The Dollar posted its best single-day rally since October 26th yet fundamental leverage for this run does not inspire breakout hopes
- Over-extended moves in the Euro, Pound and Canadian Dollar should be monitored if a turn back into range is a more probable course
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Risk Trends Stabilize and Holiday Liquidity Approaches
Global measures of 'risk trends' have steadied - though volatility has certainly not fully discharged. Looking at the major US equity indexes as my favorite, imperfect measures of sentiment, we find very prominent technical levels standing guard as support. The S&P 500 finds the rising trendline that starts with the January 2017 low falling right around 2,585. The Dow's floor is more progressive in a floor on an exaggerated head-and-shoulders pattern roughly at 23,500. Given the activity of the week thus far and the pressure over the preceding two, it would seem that we are only one dismal head away from the long-awaited bearish reversal that either breaks the post-US election rally or the entire post-Great Financial Crisis recovery. We may find ourselves there yet sometime in April or beyond, but that would be difficult to accomplish this week. Not only has focus on the critical fundamental themes - trade wars, monetary policy - died down, but we are heading into a well-known and thereby well-anticipated liquidity drain. We are heading into a three-day weekend for many countries and four-day for Europe. Reversing a systemic trend despite the deep market drain is possible, but very unlikely.
Keeping an Eye on FANG and Technology Stocks as Overall Risk Threat
Though the capacity for a full-scale reversal in sentiment and the broad markets is highly unlikely, that doesn't mean we shouldn't keep close tabs on the risks to the market that trigger the pent up pressure when the markets are again topped off. We still have trade wars, political risk and monetary policy galore; but one of the most effective ways to lead the market down a bearish path is to have the same trendsetters that led the markets higher guide the way. While the rise in capital markets for the past nine years was wide, there have been certain leaders that have moved to the forefront. The tech sector in particular has championed a substantial portion of the enthusiasm particularly over the past three or four years. And, in that grouping, we have the certain tech companies that are so large and consequential to the bullish view that they have earned their own acronym: FANG. Though Netflix hasn't suffered its own unique headline pain; Facebook, Amazon and Google all have with the share price hits to match. Most recent was Amazon which has reportedly earned the ire of the President for jeopardizing brick and mortar businesses.
Biggest Dollar Rally in Five Months Offers Limited Trend Potential
In FX, the Dollar finally topped the headlines with bullish news. The currency posted its biggest single-day rally since October 26. Further, Wednesday's climb was the second largest since the broader bear trend set in for the Greenback. It is important to put the decline in that context: it is a correction in a prevailing trend until the technical progress or fundamental headwind are so significant that conviction flips. Looking to the event risk this past session, there was little to put that kind of certitude behind the market. The top headline was a final revision to the previous GDP update, which carries extremely little speculative value. Themes like trade wars have seen relatively little progress that would offer favor to the troubled currency. The same general suspicion should be cast on the market-moving potential of the upcoming PCE deflator. Though the Fed's favored inflation indicator, we know the market has given the outlook for rates little sway when it comes to Dollar bearing.
US Dollar Index
Stretched Currencies and Well-Positioned Ranges
When we are looking for opportunities in markets where trends are maturity and liquidity is expected to retreat - albeit temporarily - it is better to seek out areas that are speculatively stretched. There are substantial overshoots in the FX market from the Euro, Pound and Canadian Dollar. From the Euro, the ill-earned rate forecast was the genesis and it kept moving when the theme was threadbare. Markets turned to a worst case scenario view for the Sterling after Brexit, but the recovery since the October low now looks overly optimistic. Neither of these trends though is easily corrected in the short-to-medium term. The Canadian Dollar is perhaps better suited for timeliness considering distinct catalysts drove it lower (tariffs, NAFTA negotiations and cratering rate forecasts) and all three are prominently recovering. Yet, if we are really looking at the most appropriate markets with time as a critical factor, few are better than the ranges that gold and oil have fostered. Narrow perhaps, but well founded. We discuss all of this and more in today's Trading Video.
XAU/USD
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