Dow Bulls Have Another Chance, Dollar Needs a New Foothold to Keep Climbing –


Dow Jones Industrial Average, Meme Stocks, VIX, Dollar, Fed Funds Rates and USDJPY Talking Points:

  • The Market Perspective: EURUSD Bearish Below 108, Dow Range Between 34,200 and 33,200
  • Fed Chairman Powell’s remarks were closely watched by the market, but market rate forecasts had already closed the gap to the central bank forecast before he spoke
  • With US rate expectations finding balance and the next 24 hours’ docket light, the greatest potential for a strong move is a surprise headlines or a more rudimentary ‘risk’ development

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The market’s alertness to rough seas in risks trends was high this past session between some signs of instability in once-favorite meme stocks and anticipation around Fed Chairman Jerome Powell’s scheduled Q&A in the early afternoon hours in Washington. Ultimately, the benchmark risk assets earned a measure of recovery, which would prompt some to interpret genuine enthusiasm. I consider the developments this past session more ‘relief’ to the preceding 72-hour risk reversal. The difference is that that a motivated turn could draw more drive to translate a technical event into a meaningful trend development, while a rebalance is a finite influence that will need a fresh wind to develop traction on significant market developments like major breaks or trends. With the economic docket over the next session – and generally through the end of the week – light of singularly-influential events, the onus for earning a significant progression will be set substantially higher.

Looking at the various outlets for flare ups in ‘risk trends’ that can turn into full-blown fires, a few developments to start the week with outsized potential were snuffed out. In particular, the heightened volatility of key meme stocks was on my radar. A side effect of the creeping recovery in the more speculative of venues, the charge Monday in Bed Bath & Beyond stock harkened back to the early days of 2021 when stimulus flush novice traders were flooding the market looking for fast-moving opportunities. The nearly 130 percent rally through Monday’s session was met with the news that the company would attempt to raise over $1 billion in funds from a share sale (a dilution of the stock price) or face bankruptcy also recalls the rug pulls of previous years. BBBY dropped -49 percent this past session but the hit didn’t go much beyond GME and AMC, with the Nasdaq 100 (a more robust ‘risk favorite’) advancing healthily. There is still an imbalance of stretched speculative exposure in these markets between retail exposure, short runs and extremely low premium for risky assets; but that doesn’t have to force the market into rebalance. Moving forward, the S&P 500 and Nasdaq 100 are near their five-month highs set last week, but I will be placing greater weight on the Dow’s intent. With so much charged speculative activity, false breaks are likely from the more sensitive indices. The stoic ‘blue chip’ will be more reserved.

Chart of Dow Futures with Volume, 200-Day SMA, 10-Day Historical Range and ATR (Daily)

Chart Created on Tradingview Platform

One of the key macroeconomic opportunities to tip the fundamental scales this past session was through US interest rate speculation. The charge in implied Fed forecasts and related rally in Treasury yields, bore a significant weight on risk markets that have at least tacitly built expectations of a safety net on the backing of the Federal Reserve’s capitulation on its tightening effort. The strength in this past Friday’s labor and service sector data was certainly reason to cut the market’s discount to the Fed’s stated interest rate targets; but by the close on Monday, the market’s view had closed the gap to the central bank’s official forecast. The implied terminal rate through June from Fed funds futures had hit just below 5.1 percent. What were the probabilities that the market would continue to build a hawkish premium? Fairly low. As such, Chairman Powell’s remarks this past session were generally in-line with the common Fed line, and so speculation would have little to feed the next leg. It’s possible that modest rate cut forecasts priced in for the second half of 2023 could be stirred for further influence, but the Dollar is likely going to need a new fundamental outlet to carry us to the next leg.

Chart of DXY Dollar with 50-Day SMA, Overlaid with Implied Fed Rate Jun 2023 (Daily)

Chart Created on Tradingview Platform

Where interest rate expectations are under increasingly nuanced debate between bulls and bears, we still have a wide open potential for risk trends to exert a serious impact on the market. With the VIX volatility index just below 19, there is still a significant premium to previous years’ low points, but we are still near the most deflated levels in a year. That suggests that there is less likely an intense drop in volatility which could encourage a stronger rally in risk benchmarks like the Dow, but a sudden flare up which pulls the market down is always a looming threat. The same fundamental outlet applies to the US Dollar. The correlation between EURUSD or USDJPY to the VIX index is still strikingly strong – though it could ebb the longer activity levels trudge at lower levels. Among the Dollar-based majors, the two aforementioned pairs are good candidates on this line, but USDJPY is perhaps more attuned for a swell in risk aversion (jump in the VIX) given the lack of challenge the Japanese monetary policy backdrop represents to the Fed and Dollar.

Chart of USDJPY with 50-Day SMA, Overlaid with VIX Volatility Index (Daily)

Chart Created on Tradingview Platform

Referring to the economic docket for potential catalysts that tap into these key themes over the next 24 hours, there is very little in the way of overt market-movers. For monetary policy, there is some Fed speak on tap, but if Powell’s remarks can’t set a clear course, what is the potential for these board members and regional presidents? There is a greater possibility that they will deviate from the FOMC ‘house view’, but that hasn’t rendered much in the way of genuine volatility – just look at the lack of impact from Kashkari’s suggestion that he still supports hiking rates to 5.25-5.50 percent, above the Fed’s consensus. Through other channels, the US President’s State of the Union could veer in topics like growth forecasts, supply chains, debt ceiling and more; but this isn’t historically a market-moving event. Elsewhere, earnings season continues; but outside of some meme and inflation implications; I’m not putting too much stock in CVS, Uber, Yum!, Walt Disney or Robinhood corporate reporting redirecting the major indices – much less the entire market.

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