U.S. Equity Markets finished Tuesday lower led by the 2.01% fall in the NASDAQ 100. With all three American Indexes falling, the VIX built on Monday’s gains, closing higher by 6.84% at a price of 22.17. Markets continued the week’s decline. Headlines continue to be dominated by the Federal Reserve’s interest-rate policy decision and the factors that could sway its decision. Firmer labour market and services data are still driving the latest bearish investor sentiment. Overall, it was a quiet day with no notable economic data released. Near-term catalysts include November’s Producer Price Index reading and December’s Michigan Inflation Expectations on Friday. If investors are looking for the stock market’s direction in the near term, there is no better indicator than this – U.S. Dollar Index. We want to keep a steady eye on the greenback as a risk-sentiment gauge. You see, Money Managers view the asset as a statement of the current amount of available liquidity in the financial system. In short, a weak Dollar points to ample funds available, while a strong Dollar means it is harder to borrow. Hedge funds tend to be the most active institutional investors when it comes to turning over their positions. They typically leverage their portfolio by three- to five-times leverage to generate returns for their clients. So that kind of leverage on a $100 million portfolio means the assets traded would amount to $300 million to $500 million. But that is not always going to be the case. As I mentioned, a rising Dollar means the cost to borrow funds and generate greater portfolio returns will rise. That eats into Money Managers’ profits. So, it makes it harder for them to produce results and diminishes their interest in increasing risk exposure. At that point, Money Managers tend to pull money out of growth investments like tech stocks and wait for a better opportunity to get back in. Instead, they will seek the safety of assets like U.S. Treasurys or single out stocks of steady-dividend payers with strong balance sheets that pay steady dividends like Hershey (HSY). This is much like the flows we have seen since the start of this year. But signs that the Dollar is cratering signal that risk sentiment is beginning to rise. In other words, the currency is becoming more readily available and cheaper to borrow. Recently, the Dollar has broken past a third key technical support level: its 200-day moving average which comes in at a price of 105.20. While we may see an oversold bounce short-term, Long-term the direction for the Dollar is lower, which should support a steady longer-term rally in the S&P 500. Looking at a chart from the Commodities Futures Trading Commission (“CFTC”). This is part of the weekly Commitment of Traders report published every Friday night. We want to look at net non-commercial positions because those are one-way bets on a specific commodity or financial product. That means the speculators are not using the options contracts as a hedge against an underlying position for business purposes. Instead, it is solely to try and make a profit. And typically, the type of speculator that will make these large bets is a hedge fund. Those speculators had been building long positions in the Dollar, starting in mid-2021. They kept adding to their positions up until this summer. Back then, the driving force behind these increases was a hawkish Federal Reserve saying it would tighten monetary policy by raising interest rates. But now, we can see those same speculators are starting to unwind their longs in the Dollar. The central bank has increased the Federal-Funds target range from 0% to 0.25% in March to 3.75% to 4% in November. While the Fed is not done raising rates, Chairman Jerome Powell has said it will likely slow the pace of hikes beginning this month. However, the amount of Dollar exposure is still high… The five-year average has been a net long of 18,835 contracts compared with the current long of 24,892 contracts. In other words, those speculators will be forced to unwind their bets which will place more downside on the Dollar. When the Dollar is rallying, stocks tend to fall, and vice versa. There is a simple logic behind this. The Dollar’s strength weighs on the sales of U.S. goods abroad because they become more expensive as foreign currencies weaken. Considering roughly 40% of S&P 500 member companies’ revenue comes from overseas, you can see why the change would hold weight. In the last decade, we have seen this type of breakdown in the Dollar – where it falls sharply and moves below its 200-day moving average – happen twice: in May 2017 and again in May 2020. In each instance, it has pointed to above-average returns for the S&P 500. So, even though the Fed pledged to slow the pace of interest-rate increases, it will still likely add a 50-basis-point hike when it meets later this month. That will raise the Federal-Funds target range to 4.00% to 4.50%. But policymakers are also guiding for a level of 4.75% to 5.25% before they will consider pausing. That means December’s meeting would get us even closer to the peak interest rates. Sooner Money Managers get a sense of peak interest rates, the sooner they will become more optimistic about risk assets like stocks – which will support a longer-term rally in the S&P 500. Any rally in the Dollar to the 108.00/109.50 is to be aggressively sold for a move below 100. Within the S&P 500 Index, 10 of the 11 sectors finished lower. European Markets closed lower. Markets ended the day lower as investors’ risk threshold was dampened following stronger economic signals from the U.S. The European Central Bank Chief Economist Philip Lane offered another signal that rate hikes were likely to slow in December, asserting inflation’s peak is very close (if it hasn’t already peaked). German Industrial Orders expanded more than expected. U.K. industry data showed Retail Sale gains were largely driven by inflation rather than volume spending. Finally, both nation’s Construction Purchasing Managers’ Index showed weaker figures. In Asia, Equities encountered a volatile day that saw Asian markets mixed Tuesday. There was stronger sentiment that the Fed’s terminal rate may be higher than initially thought, which drove the Dollar higher. Momentum around China’s reopening plans continued to surge with Beijing among the latest cities to scrap negative test requirements to enter public venues. Meanwhile, COVID-19 outbreaks in the country have stabilised. Overnight, it was announced that following recent protests, China has rolled back strict COVID rules. On a central bank front, the Reserve Bank of Australia raised rates by 25 basis points, as expected. Meanwhile, the Bank of Japan’s Ishida Kuroda downplayed any major policy review. Elsewhere, Oil fell 3.31%, closing at its lowest level since December 2021, while Gold rose 0.13% despite a stronger Dollar.
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For anyone following my Platinum Service it lost 110 points yesterday and is now ahead by 566 points for December after closing November with a gain of 4789 points, while finishing October with a record gain of 9619 points, making 6660 points in September, after closing August with a gain of 2228 points, having made 2660 points in July, following a gain of 3371 points in June. The Service made 3651 points in May, after making 762 points in April, following a gain of 5883 points in March. The Platinum Service made an impressive 5324 points in February, after ending January with a gain of 3878 points, more than making up for December’s 932 points loss. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points. I have a YouTube Channel which contains recent interviews I have given This can be viewed by clicking HERE Please subscribe to this for new interview notification
The S&P 500 closed 1.44% lower at a price of 3941
The Dow Jones Industrial Average closed 350 points lower for a 1.03% loss at a price of 33,596.
The NASDAQ 100 closed 2.01% lower at a price of 11,549.
The Stoxx Europe 600 Index closed 0.58% lower.
This morning, the MSCI Asia Pacific Index fell 0.91%.
This morning, the Nikkei closed 0.72% lower at a price of 27,686.
The Bloomberg Dollar Spot Index closed 0.4% higher.
The Euro closed 0.3% lower at $1.0462.
The British Pound closed 0.4% lower at 1.2141.
The Japanese Yen fell 0.1% closing at $137.06.
Germany’s 10-year yield closed 7 basis points higher at 1.82%.
Britain’s 10-year yield closed 2 basis points lower at 3.08%.
U.S.10 Year Treasury closed 7 basis points higher at 3.53%.
West Texas Intermediate crude closed 3.31% lower at $74.85 a barrel.
Gold closed 0.13% higher at $1769.10 an ounce.
This morning on the Economic Front we already had the release of German Industrial production which fell 0.1% versus -0.6% expected. At 10.00 am we have Euro-Zone GDP and Employment Change. This is followed by U.S. MBA Mortgage Applications at 12.00 pm and Non-Farm Productivity at 1.30 pm. Finally, we have the Bank of Canada Rate Decision at 3.00 pm.
Cash S&P 500
The break and close below the 200 Day Moving Average on Monday was the sixth time this year that the 200 Day MA has proved too hard to crack, despite the Dow having no problems breaking this key resistance area. The S&P is now below both its 8-day and 10-day Moving Averages, suggesting short-term momentum is also weighing as we have seen so far this week. The 2s/10s Treasury Curve closed last night at -80 basis points. This is the most deeply inverted curve since April 1981. The peak in Fed Funds came exactly two months later in June 1981, followed by a recession that started in July 1981. I have a strong suspicion that next week’s Fed hike will be the last of the current cycle, with recession to start in early 2023. This week’s decline is a lot worse than it seemed. Banks have got obliterated, down 10% in just four days. We saw similar action in key tech stocks with Amazon lower by 9% and Tesla down 12% over the past few days. As a result the McClellan Oscillator closed with a negative 67 print. The two-hour RSI has now gone from overbought last week to oversold, making it tricky to be short the S&P at this time. Yesterday, the S&P traded the whole of my buy range and I am now long at an average rate of 3961 with the same 3939 ‘’Closing Stop’’. I will have a T/P level on this position at 3975. I will continue to be an aggressive buyer on any dip lower to 3850/3870 with no stop or T/P level if triggered. I no longer want to be short the S&P at this time.
Unfortunately, the Euro missed my 1.0550 initial sell level with a 1.0533 high print before selling off to sit at 1.0450 this morning. I will continue to be a strong buyer on any further dip to 1.0340/1.0410 with the same 1.0275 ‘’Closing Stop’’. I no longer want to be short the Euro at this time.
March Dollar Index
I am still flat. As I mentioned in my commentary above, the Dollar is short-term oversold and due a bounce to at least 108 where I will be an aggressive seller if triggered over the coming days. Short-term the Dollar has support from 104.40/105.10. I will move my buy level higher to this range. If triggered, I will have a 103.85 ‘’Closing Stop’’.
After the DAX traded lower to my 14320-buy level I had too many open positions. In order to reduce my risk, I emailed my Platinum Members to exit any long position at 14350 and I am still flat. This morning the DAX is trading lower at 14280. We have support from 14100/14180 where I will again be a strong buyer with a wider 13995 ‘’Closing Stop’’.
The FTSE continues to trade in its own space. I am still flat as I continue to be a seller from 7600/7680 with the same 7735 ‘’Closing Stop’.
Dow Rolling Contract
Although the Dow fell yesterday, it was not as weak as both the NDX and S&P. However, yesterday’s move lower saw the whole of my buy level filled for a now 33615 average long position. I will leave my 33395 ‘’Closing Stop’’ unchanged while lowering my T/P level to 33700. If any of the above levels are hit I will be back with a new update for my Platinum Members.
Cash NASDAQ 100
Wrong!! Despite Treasury Yields falling the NDX got hit hard yesterday, closing lower by 2% and in the process stopped me out of my 11785 average long position at 11560. As the NDX is now oversold, I have bought the market this morning here at 11540. I will add to this position at 11380. My T/P level will be 11675 while I will have a wider 11255 ‘’Closing Stop’’. If any of the above levels are hit I will be back with a new update for my Platinum Members.
The Bund has surged over the past 24 hours, trading at 142.90 this morning. I am still flat. I will now raise my buy level to 140.90/141.80 with a higher 139.95 ‘’Closing Stop’’.
Gold Rolling Contract
Thankfully, Gold rallied to my tight 1779 T/P level before selling off on the back of the weaker stock markets and stronger Dollar. I am still flat. Gold has support from 1740/1755 where I will again be a buyer with a 1729 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long at 22.70 with the same no stop policy. I will still look to add to this position at 22.00. I will now lower my T/P level to 23.30 and if any of the above levels are hit I will be back with a new update for my Platinum Members.