September 26, 2020

STOCKS – None

Macro – SPY, QQQ, GLD, SLV, FXE, UUP, EWG, EWB

Mike’s Reading The Markets (RTM) Premium Content – NOW WITH A 2 WEEK FREE TRIAL 

 

• RTM Live Webcast 9.24.20 – Replay
• Risk Aversion Rising – Midday
• More Derisking Taking Place
• Stocks Fail, 2,860 Still In Play
• Stocks Failing At Tough Resistance Levels
• Stock Mount Weak Rally, Watch For Afternoon Fade- Midday

Stocks rallied back on September 26, with the S&P 500 rising by 1.6% and the QQQ’s increasing 2.3%. The picture is a bit murky after Friday’s price action. Between short-covering ahead of the weekend and hopes of the Monday morning gap higher, stocks had an unrelenting bid starting after lunchtime.  But the derisking of global markets appears to be in full swing.

Although to some, it may have seemed like the bulls were back, and we are about to return to our August ways, I would say this market still has a lot to prove. It wasn’t your typical August convexity squeeze powered higher by massive call volume, causing market makers to have to get long gamma, sending shares higher. Call volume on Friday among all stocks was well below what we saw throughout most of August. 

The QQQ chart reveals how the 50-day moving average is just one force that is acting as resistance. That is coupled with a downtrend and resistance in the $272-273 zone. The bears seemingly knew precisely how much room to give to not provide the bulls with much confidence heading into Monday. 

When we look closer, we can see that the ETF also just below that gap four prior times. It tells us that there is something about the $272-273 zone that the Algo’s seem to be clinging too. 

Meanwhile, the S&P 500 seems to remain firmly entrenched it its downward sloping channel. Additionally, despite the strong showing by the markets, the advance-decline failed to move higher significantly. 

But the bigger problem may be what is happening abroad as there was a severe weakness in markets, such as South Korea. The KOSPI appears to be in a dangerous position, potentially forming a double top pattern, a very bearish pattern. It could result in a 14% decline to around 1,952, and a technical gap from May 18. Right now, the index is sitting on a level of support that dates back to its early 2020 highs. 

Meanwhile, the German DAX plunged below a significant uptrend this past week, which places it in danger of falling back to a gap around that same May 18 date, a drop of about 15%. 

The UK FTSE may be telling us exactly where the other markets around the world are going because it is the furthest along in its decline, down over 11% and heading to support at, well, its May 18 level. 

One clue that sell-off may continue to get worse is that there so no fear in this market. The VIX index, although already high, has hardly budged. Despite the S&P 500 down around 8% from the peak, and 11% at the trough. The VIX in lesser volatile times, on an equal size pullback, has reached higher levels. (This was reviewed in the webcast – RTM Live Webcast 9.24.20 – Replay)

Meanwhile, the put to call ratio remains just at 1! That ratio has typically peaked at much higher levels in market bottoms. 

Meanwhile, there has been no flight into bonds in the US. 

Nor in Europe 

While some may think that is because there is nowhere else to put your money. I can tell you that sometimes it isn’t about a return on your capital, but the return of your capital. And in times of extreme fear, a 50 bps negative yield on a Germany 10-year is better than the alternative. 

Meanwhile, risk assets and anything linked to inflation or growth are getting crushed. For example, gold has fallen below a critical level of support at $1,915 and is likely on its way to $1,790. 

Silver has been destroyed. 

Lumber has been massacred. 

Meanwhile, currency’s linked to risk assets are also under assault, with the Aussie Dollar coming down hard this past week versus the US dollar. 

 

While the Euro was crushed, as coronavirus cases in Europe rise rapidly. 

As investors realize that despite all of its problems, the US dollar may still be the safest place to be. The dollar broke above that critical level of resistance at 94. 

As long as the dollar continues to rise, it will wreak havoc on risk assets. If you want to know which way the stock market and risk assets will go, figure out the direction of the dollar. The dollar is likely only to continue to strengthen in the days and weeks ahead. The signs the dollar would rally were there in plain sight, with the cost to borrow dollars aboard rising since the middle of August. 

It may be as simple as a stronger dollar, which means more derisking and lower equity prices. 

We have been reviewing this stuff for weeks in the premium area. Sign-up and get the first two weeks to check it out for free.  (From 9/2 – Why The VIX And Dollar Are So Important – Morning)

-Mike