As noted yesterday, the U.S. dollar index, the DXY is on course for its largest monthly fall since January 2018. The U.S dollar has fallen against a backdrop of rising bond yields and a steepening of the U.S. yield curve. Notably the previously inverted U.S. 3mth – 10 year bond spread frequently cited as a barometer of recession is now trading back in positive territory.
The catalysts for the moves mentioned above have been a lowering of interest rates from central banks and an easing in geopolitical tail risks that include Brexit and the U.S. - China trade war. Much to the annoyance of the doomsday crowd who only ever recommend buying bonds and the U.S. dollar, growth fears have receded for now.
In theory, U.S. stocks and the S&P500 should be a beneficiary of this shift in the macro narrative for reasons including a lower U.S. dollar helps make U.S. exports more competitive. However, the S&P 500 appears unconvinced and unwilling to break higher, despite closing for the last five sessions just 1.5% below all-time highs.
This lack of commitment is also reflected by investor sentiment towards equities which remains subdued by historical standards. Although last week’s AAII bulls and bears sentiment index bounced to 33.6% bullish from a very low reading of 20.3% the previous week, the gauge sits below its long-term historical average of 38.0%. Until the S&P500 shows it’s hand this reading is unlikely to significantly change.
From a technical perspective, while the S&P500 remains below trendline resistance and recent highs 3020/3030, it is at risk of another corrective leg lower towards trendline support at 2900 and possibly towards the August low at 2775.75. A break of support 2860/50 area would be an indication this move lower has commenced.
Conversely, should the S&P500 hold onto recent gains and then breaks/closes above trendline resistance and year to date highs 3020/3030 area, it would confirm the correction which started in late August is complete and that the uptrend has resumed.
Source Tradingview. The figures stated areas of the 22nd of October 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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