S&P 500 Bull Trend and Dollar Breakdown Look for September Seasonal Shift

S&P 500, Dollar, Australian Dollar Talking Points:

• Risk appetite was on an uneven footing through the end of this past week with the S&P 500 and Nasdaq pushing records while other risk measures (EM, junk bonds, carry, etc) flagging
• Conditions remain my top priority for market evaluation as we make the transition to ‘Summer Doldrums’ to more active fall trading
• While the S&P 500 and Dollar are key measures to watch, the Australian Dollar is raising its profile to a unique position for volatility watchers

Risk Appetite: Leaders and the Average

Looking at the pacesetting US indices this past week, there was an unmistakable drive behind risk appetite. The S&P 500 not only clear record highs set back in February, but it further earned daily record highs through the week. That is quite the statement from a favorite sentiment milestone but it is even more remarkable for the disparity it represents relative to seasonal expectations. Normally, during this period of the year, the markets struggle for commitment – an ailment that seems familiar with so many other sentiment favorite. Are US indices the exception to the rule? Can these bastions of risk appetite continue to drive new records or have we witnessed the extent of passive risk appetite appreciation? Liquidity consideration transitioning from the ‘summer doldrums’ to the active fall session is an ominous presence, but is that a matter for the week ahead? That should be an important question or those weighing in on risk for the near term.

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Chart of S&P 500 with Consecutive Candle Measure, Disparity Index (Weekly)

Chart Created on Tradingview Platform

In terms of risk performance, there remains a preference for those benchmarks that have defaulted to momentum in previous weeks, months and years. For recent performance, we see an extension of the disparities developed over previous years. The S&P 500, as a representation of US indies, remains a pace setter – unless you add the tech-heavy Nasdaq to the mix. This relative measure will prove important moving forward. Rather than putting the emphasis on performance for individual milestones, a broad swell – or collapse – is a more comprehensive and believable measure for those monitoring trends.

Chart of Risk Assets Performance Relative to Annual Performance (Daily)

Chart Created by John Kicklighter with Data from Bloomberg

Seasonal Conditions and Systemic Drivers

The big transition I am watching leading into next week is the expected shift in seasonal performance. We have just closed out the last full week of August and are entering the month of September. There is little disputing the restrictions inherent in the average performance and liquidity of the former month, while the latter period has been a sign post for those looking – and hoping – for volatility. September historically shows a significant pick up in volatility measures alongside a moderate rise in volume, which seems to translate into the only average loss for a calendar month of the entire year. ‘This time is different’ is a statement that applies here, but conditions elements are what matters now.

Chart of S&P 500 and VIX Seasonal Performance (Monthly)

Chart Created by John Kicklighter with Data from Bloomberg

While systemic market conditions draw considerable debate, the fundamental matters remain on an uneven footing. Given the close of the Jackson Hole symposium this past week, monetary policy remains one of the principal themes that I intend to monitor. Through this past week, the Jackson Hole Symposium seemed to fall short of the all-in speculative support measure many seemed to be expecting. Fed Chair Jerome Powell did announce a ‘lower rates for longer’ policy, but that didn’t seem to have the same impact that large stimulus programs, yield curve control rumination or negative rate discussion seemed to have previously. Should global confidence in monetary policy slip, beware the fallout.

Chart of Central Bank Monetary Policy Effectiveness

Chart Created by John Kicklighter

The Dollar and Aussie Dollar as Top Market Potential Next Week

Among the systemic FX movers, the Dollar remains at the top of my watch list. The Greenback has held to a general range over the past month and a half but the threats have grown sharply. The US currency faces the risk of systemic diversification as well as the material flagging registered in the world’s largest market relative to global counterparts. It isn’t clear whether the Dollar will take on the role of a benchmark that directly reflects relative growth potential or sheer safe haven appeal. This shift in standing likely depends on the intensity of sentiment ahead. I will be watching volatility and the correlation in risk assets ahead, but perhaps it is also important to keep tabs on the Friday NFPs for August jobs figures for Dollar volatility.

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

Chart Created on Tradingview Platform

For top performance among the majors, it would be remiss of me not to highlight the charge from the Australian Dollar. AUDUSD rallied to its highest levels since late 2018 but what is truly remarkable is the fact that the currency (AUD) is progressing across the market when most other measures are spinning their tires. Is this the unusual market-leaders amid so much false hope? Perhaps the loaded economic docket ahead can help determine this market’s intent. While there is a range of Aussie data ahead, the 2Q GDP and RBA rate decision will draw the most scrutiny through the period.

Chart of AUDUSD with 20-Week Moving Average and Spot-Moving Avg Divergence (Daily)

Chart Created on Tradingview Platform

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