First, a little more context for yesterday’s update about items that would correlate well with a strong USD. Those were the Small Caps, which do a higher proportion of domestic business than Large Caps, and the US Retail sector, which theoretically gains a tailwind when consumers have stronger dollars able to buy more of their products over time.
Out of the stocks noted I see the likes of AMC, ROKU, CTRL and possibly IRBT and TPR as being relatively insulated (confirmation would take further research) and WMT and possibly ULTA as retailers that could incur some yet to be determined effects from trade tariffs once the bluster fades and actual policy is enacted. Just an FYI because in this market it’s never as simple as a blanket statement like “the dollar is strong so retail will do well”.
US Dollar, US Stock Market & Global Markets
Futures are in the red again as the trade tremor seems to fade a bit, but the market is not out of the woods yet. The USD is strong yet again this morning and as we know, a large chunk of the economy that fiscal reflation has been aimed at would prefer a weaker dollar. It is no surprise that Industials and Materials are relatively weak in this environment.
For my part I am still observing the parameters of the daily S&P 500 chart we last updated on Tuesday morning. It is still intact to the short-term lateral support shelf and the gap at 2734. But within this I am trying to rotate a bit. That took the form of taking a small profit on Large Cap global business doer CSCO in after hours yesterday and more moves – with an eye toward keeping cash levels nice and comfy – may be made as well to continue to rotate toward a preferred group of holdings for the current market. As an example of a fragmented market, with the Industrials (XLI) very weak the Small Caps (IWM) and Retail (XRT) made fresh highs yesterday. I want to be somewhat in line with this but favor income-paying cash above all else due to the general ‘rising risk’ view.
Globally, the Emerging and Frontier markets and LatAm have been getting hammered and they are part of the anti-USD trade. They are relatively weak primarily for that reason. We have noted certain Asian markets (S. Korea, Thailand, Malaysia, etc.) that are bearish and now the broader AAXJ iShares looks like a short or an avoid as it continued to break down. While Japan and Germany/Europe have been firm relative to other areas, their daily charts are questionable on the short-term. The thing with these two items especially is currency effects. If a strong USD translates to weak Euro and Yen, the trade balance would eventually favor Europe and Japan.
Finally, Canada and Australia bolted to new highs and I am not going to pretend to know why beyond currency dynamics. It appears that these two countries are winning the ‘currency depreciation sweepstakes’ as their respective CAD and AUD are extremely weak and breaking down (in line with the breaks up in their stock markets).
Precious Metals, Inflation Trade & CRB Index
I continue to see gold in the mirror to the risk ‘on’ world and folks, risk is still ‘on’. The PMs rose with the general inflation trade (IT), but with the firm buck the IT is sputtering as expected. In an update a couple days ago we reviewed fledgling breakdowns in GDX and GDXJ. Those breakdowns gained more oomph yesterday. The sector appears headed for the targets we noted in that update (GDX 21 +/-, GDXJ 30.50 +/-).
Inflation expectations as gauged by the TIP/TLT and TIP/IEF ratios are still generally flat and have not made the next major directional move and long-term Treasury yields have been capped and going nowhere as well (after being conveniently stopped in their tracks at our big picture limiter AKA the 100 month EMA on the 30yr yield). I wonder if, after all that hype about a new bond bear market and a new paradigm in long-term interest rates the limiter might hold yet again. A strong stock market correction could do the trick in putting ’em all back in the safety of Treasury bonds, after all. Just thinking aloud here; we’ll continue to track the realities of the situation as it develops.
The CRB index has broken down from the daily chart trend channel we’d noted previously, but is now testing the 200 day moving average. Who wins there as a valid indicator, the trend channel or the SMA 200? I don’t like commodities until I get an answer to that question.
Bottom Line
Cash (or T Bills) is paying another .25% after the Fed’s rate hike last week. That is the default position against a backdrop of bearish precious metals (they’d eventually bottom and lead again if/as/after the market goes bearish), bearish commodities, flat inflation expectations and a fragmented US and global stock market with risk rising. Time to play defense, not offense regardless of the status of risk still ‘on’ and a top-test scenario still technically intact.
