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S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

2020-08-27 03:30:00
John Kicklighter, Chief Strategist
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S&P 500, Nasdaq, Dollar, USDCNH Talking Points:

  • The S&P 500 and Nasdaq 100 accelerated their five day climb through Wednesday’s close but other risk benchmarks were conspicuously reserved
  • Top event risk ahead is the Jackson Hole Symposium which many will watch for further stimulus to reinforce exuberant risk taking habits
  • Underlying the gathering of financial leaders is the reality of a clear divergence in economic performance and financial largesse – a factor of monetary policy

The S&P 500 Continues to Blaze a Path Few Risk Assets Intend to Follow

Risk appetite this past session was leaning explicitly higher according to the outperforming US benchmark indices. That would be an encouraging signal for global investor sentiment heading into the two-day Jackson Hole Symposium where policy and market leaders are due to discuss policy options ahead if it weren’t for the fact that the drive was once again isolated to very particular outlets. Notably, the S&P 500 and the Nasdaq 100 were traversing record highs with some modest measure of momentum through the closing hours of the US session Wednesday. That would have been evocative of a groundswell in bullish sentiment if not for the disconnect from other measures of speculative appetite. The blue-chip Dow for example would actually close the day lower.

Learn more about the three types of general Forex market analysis in our education section.

US 500 MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% 4% 4%
Weekly 21% -6% 5%
What does it mean for price action?
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Chart of S&P 500 with 50 and 200-Day Moving Averages and Disparity Index (Daily)

S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

Chart Created on Tradingview Platform

My true concern around the intent of risk appetite, however, was the lack of reinforcement from other asset classes that both maintain a ‘risk’ connection yet refused to follow the S&P 500 in its swell despite open market hours matching those matching US equities. The ETFs for emerging markets and high-yield fixed income were little change as were the pairs directly connected to carry trade – such as AUDJPY (learn more about the carry trade in our education section). Such inconsistency across asset types raises serious questions over the true scope of sentiment. Meanwhile, the concentration associated to the FOMO mentality continued to accelerate. The S&P 500’s (and Nasdaq’s) charge higher relative to these various compatriots of sentiment seem to suggest speculative opportunism is in control rather than underlying enthusiasm.

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Chart of Ratio for Nasdaq 100 to VEU Rest of World Equity ETF (Daily)

S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

Chart Created on Tradingview Platform

Jackson Hole Will Bring Monetary Policy Back to the Foreground

Looking ahead to the final 48 hours of trade this week, there is a fundamental anchor for speculators to throw their expectations behind: the Jackson Hole Symposium. The gathering of central bankers, financial ministers, corporate leaders and other key market participants historically touches upon key topics for the global economy each year. Yet, the equation remains: is it meaningful enough to upend the liquidity curb typical of the seasonal liquidity drain? This year’s meeting is virtual and its central topic is monetary policy over the next decade. This should interest everyone given the role accommodative rates and stimulus have played in the past decade. I would argue that near zero (and in some cases, negative) benchmarks as well as large QE infusions have played a critical role in buttressing the market recovery. Yet, how much room is there for more? What would happen if the market’s were to collective agree that value has been fostered (or even supplanted) by an external force that is inherently is limited and even proactively against speculative excess?

Chart of S&P 500 Overlaid with Major Central Bank Balance Sheets (Monthly)

S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

Chart Created by John Kicklighter with Data from Bloomberg

One of my top (but background) concerns these past years has been: what happens should markets lose confidence in the effectiveness of monetary support? There is an unmistakable correlation between the efforts of the major central banks and the performance of capital market benchmarks which I consider causation rather than mere correlation. As the Fed, ECB, BOJ, BOE and others have had to shift increasingly to the unorthodox as they’ve run out of options in their standard toolkit, they have run the risk of reaching the limit in a sentiment context if not a practical one. Should global markets find themselves in a position of losing confidence in these external girders, years of structure shoring up speculative appetite could come crashing down.

Chart of Consumer Confidence, Expectations and Present Conditions with S&P 500 (Monthly)

S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

Chart Created by John Kicklighter with Data from Markit

Relative Issues from Stimulus to GDP to Trade

While the redeemer status of central banks will be the top scheduled interest through the final two trading sessions of the week, that doesn’t mean it is the only fundamental interest/threat to account for. Aside from the holistic implications of sentiment tied to monetary support, there is also the factor of relative potential. EURUSD charged higher through last month in part due to the EU-27 agreeing to the implementation of a 750 billion euro stimulus effort that seems to shore up greater potential for a ‘V-shaped’ recovery for Europe relative to the US (and other countries). Is the US and Dollar due to get its own upgrade from the Fed in the former of yield curve control or some other unconventional program? And would it even be hailed as a boon? Meanwhile growth measures continue to cast a dubious shadow. The US durable goods orders 11.2 percent jump this past session was saddled with the caveat of a build predominantly in auto and truck orders. Ahead, Chinese profits, Swiss 2Q GDP, Eurozone lending and US initial jobless claims will all carry some sway for the growth assessment.

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Chart of DXY Dollar Index with 100-Day Moving Average and Disparity Index (Daily)

S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

Chart Created on Tradingview Platform

Trade wars is another matter of interest that seems to ride conveniently in the backdrop. Earlier this week, it was apparent from the run of rhetoric from US trade representatives and advisers on China, that they were making a concerted effort to cool tensions spurred by the White House. This is not likely an effort to soothe the relationship with the second largest economy but more likely tame the negative impact on the attentive capital markets heading into the US Presidential election. Nevertheless, the USDCNH has dropped to fresh 7-month lows below 6.90.

Chart of USDCNH (Daily)

S&P 500 Accelerates Higher Without the Market, Dollar Ready for Jackson Hole

Chart Created on Tradingview Platform

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