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Dollar Suffers Volatility After CPI and Was that a True S&P 500 Break?

Dollar Suffers Volatility After CPI and Was that a True S&P 500 Break?

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S&P 500, Dow, Shanghai Composite and Dollar Talking Points

  • US CPI eased back from its multi-decade peak, but the 4.0% core and 5.3% headline tempos are hardly relief for the Fed to back away from taper discussions
  • The S&P 500 technically slipped its trend channel with Tuesday’s close and the Dow is back below its 100-day SMA, but conviction remains questionable
  • Event risk may not be as critical ahead, but it is certainly more abundant with data from China, Australia, the UK and US
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Is It a Break or Not

With the US CPI crossing the wires amid constant monetary policy speculation and liquidity expectations shifting after a weeks of struggle for risk assets, it would seem we are dealing with an environment primed for a break and drive. However, as meaningful as accommodative monetary policy is to the status quo, bullish bearing for the markets at this stage; the data didn’t exactly seal the fate of a taper announcement from the Fed in a week’s time and that was enough room for skepticism for complacency to hold fast. And yet, we would still be presented with a few provocative technical milestones from some of my preferred benchmarks for sentiment. The stalwart and most heavily derived index in the world, the S&P 500 closed below 4,450 this past session to break the trendline support that I have on a channel stretching back to March of last year – shortly after the pandemic bottom. As ‘clean’ as the level is, there is always dispute over where the line in the sand is; which is why I would prefer the 50-day SMA to give as well as a clear charge of momentum to further mark the occasion before my confidence is won. And that is going to be hard with the scheduled docket we have ahead; though the unexpected is always lurking.

US 500 Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 2% 4% 3%
Weekly 15% -17% -1%
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Chart of S&P 500 with 50-Day SMA and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

Another notable technical development that perhaps can further urge the eager bears to call a turn comes on behalf of the Dow Jones Industrial Average. The so-called ‘value index’ earned the honor of the first bearish break below the trailing 100-day moving average for the first time in 215 trading days this past Friday. That could have been a significant technical milestone, but there was no bearish conviction to follow up on the move. With Monday’s jump back above the ‘trigger line’ and now a subsequent move back below the moving average, the influence of the support has likely diminished significantly. This is a great example of why technicals alone – particularly on a singular measure, even a major benchmark – is not often the motivation for a systemic move. If we insist on sticking to charts and eschewing fundamental judgement all together, I like to rely on a multi-asset correlation and momentum.

Chart of Dow Jones Industrial Average and 100-Day SMA (Daily)

Chart Created on Tradingview Platform

The Systemic and Seasonal Factors

While I am monitor the charts, the fundamental motivations are more reliable for building a head of steam among a wider swath of the participating market. While there are scheduled themes that are already backed with a rolling start (such as the global outlook for monetary policy), there aren’t many scheduled updates for the immediate future that seem capable of single-handedly redefining their course settings. While there are high level economic events on the docket, they seem more the type to generate isolated volatility for regional assets and currencies. Not everything is on the calendar however. Take for example the evolving situation around China’s Evergrande. One of the nations largest real estate developers has struggled with debt troubles that it has attempted to reassure the markets on but has distinctly fallen short of resolutions. While the $300 billion in liabilities and principal exposure through Chinese banks may seem like a relatively ‘small’ notional risk in the grand scheme of things or specifically a threat only to China’s markets, the excessive leverage that has been accumulated throughout the financial system – China’s and the world – can dramatically amplify a painful impact.

Chart of Shanghai Composite Overlaid with FXI ETF (Daily)

Chart Created on Tradingview Platform

From systemic to seasonal factors, I am also mindful of the expectations associated to this time of year. September is historically the only month of the calendar year to see the S&P 500 average a loss, but those are averages. An even more granular look says that the series of three weeks that we have just started registers a significant series of losses through each of the weeks. As we drill down in on data like this, the averages can be even more dramatic; but 120 different data points makes for a statistically relevant picture.

Chart of the S&P 500 Performance By Calendar Week Back to 1900

Chart Created by John Kicklighter with Data from Bloomberg

The Fed’s Policy Decision is a Week Away, But Speculation Doesn’t Take a Break

We are officially a weak out from the Federal Reserve’s policy announcement, updated forecasts and Chairman Jerome Powell’s post-meeting press conference. Given the degree of debate and speculation around the timing of the central bank’s taper announcement – exacerbated over the past weeks with its peers announcing or postponing their own stimulus reductions – there will be a lot of anticipation in the markets. Anticipation is perhaps an even more reliable force on markets that the passage of major fundamental developments themselves. The sheer potential of the scenarios can restrain markets and dictate shifts in exposure while the releases themselves will follow definitively only one scenario. While expectation is a strong market force, it can be stirred by speculation. This past session’s CPI release fed into that market debate. The first interpretation was that the inflation readings had cooled from the previous month. That is technically true, but the 5.3 percent headline tempo and 4.0 percent core figure are still far beyond what the Fed targets. This is still very much a support for a more imminent taper decision. That is perhaps why the rebound in US equities and slip from the Dollar did not last.

US Headline and Core CPI Year-Over-Year Change (Monthly)

Chart from Federal Reserve Economic Database with Data from BLS

Taking a closer look at the Dollar’s reaction, we find Tuesday’s trading session is a continuation of the indecision of the past week. It was yet another session of intraday reversal that would leave us with large ‘wicks’ but an frustratingly narrow range. That ‘volatility in a bottle’ situation is likely to persist so long as the determination of conviction is further ahead. As such, anticipation for more substantial market developments from the likes of EURUSD, GBPUSD, AUDUSD and others is likely unreasonable. That said, there is potential for more productivity among other crosses. Over the coming trading day, we have data from Australia (eg business sentiment), China (eg fixed asset investment and retail sales), the UK (inflation stats on multiple levels) and Canada (CPI). Explore the various crosses derived from these majors and consider their ancillary fundamental influences – such as Yen crosses taking on a ‘risk’ relationship.

Chart of DXY Dollar Index with 5-Day Range and ‘Wicks’ (Daily)

Chart Created on Tradingview Platform

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