Stocks Decline as Tariff Uncertainty Returns; Dollar Signals Potential Reversal

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Stocks had a down day, as President Trump announced the tariff rates that will take effect for several countries, including Japan and South Korea, at 25% on August 1.

Individual investors can choose to believe what they like on the topic of tariffs and if they think he is negotiating or not, and will once again chicken out. Unfortunately, that is the danger of things, given the President’s past handling of these trade deals, investors believe he will follow suit. The risk is that he won’t chicken out, and the tariffs stick and the truth is that no one knows.

Anyway, the stock market reacted as it should, and whether the declines build or not will depend on investors’ beliefs, but perhaps more importantly, how the algorithms respond. For now, the S&P 500 is above the 10-day exponential moving average, and until that moving average is broken, there is not much else to say if you are looking for lower prices.

Again, we have passed the theta burning time of July and are now back to regular trading, so we will soon find out whether the rising wedge pattern has a throwover or not.

Not surprisingly, we saw both realized and implied volatility rise on the day. We will have to see how things unfold. If the movement intensifies and realized volatility starts rising more rapidly than implied volatility, then things could get interesting.

Meanwhile, as I noted earlier today in more detail for members, the dollar appears to be in the process of potentially bottoming here, as it makes a higher low on the RSI while making a lower low on the price chart. The dollar index also rose above its 10-day exponential moving average today, suggesting that a significant dollar reversal may be on the verge of occurring. The trend lines around 98.25 are the next major test.

Big Change In Trend For The US Dollar

The next update is expected to arrive on Wednesday.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Tariff:

A tax imposed on imported goods, typically to protect domestic industries or to exert political pressure on foreign nations.
Theta Burning:

Refers to the period during which options lose value quickly due to time decay (theta), especially around holidays or slow trading periods.
Exponential Moving Average (EMA):

A type of moving average giving more importance (weight) to recent price data, making it more responsive to new information compared to a simple moving average.
Rising Wedge Pattern:

A bearish technical chart pattern characterized by two converging upward-sloping trend lines, indicating potential for a reversal downward.
Throwover:

In technical analysis, it refers to a brief false breakout above the trend line in a rising wedge pattern, usually signaling a reversal shortly after.
Realized Volatility:

Historical volatility calculated from past price movements.
Implied Volatility:

Market expectations of future volatility inferred from options prices.
Relative Strength Index (RSI):

A momentum indicator measuring the speed and magnitude of recent price movements, used to identify potential reversals.
Algorithms (Algos):

Automated trading programs executing trades based on predefined criteria without human intervention.
Dollar Index (DXY):

An index measuring the value of the U.S. dollar relative to a basket of foreign currencies, including Euro, Yen, and British Pound.

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