By Todd Stankiewicz CMT, CFP, ChFC
1/ US Dollar
2/ Is the Long Bond Oversold?
3/ Inflation Pressures Persist
4/ Tighter Credit Standards
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1/ US Dollar
Earlier this week we spoke about the long-term trend of the US Dollar being prone to a reversal. Today we zoom in to explore the price action of the last few days and how this sets up the potential longer-term trend.
On October 3rd the Invesco US Dollar Bullish ETF (UUP), a proxy for the US Dollar Index, displayed a Doji Candle. This is where buyers and sellers were equally matched. After long trends, such as one we just experienced, Doji Candles can indicate a reversal in the trend. The potential for a reversal is further increased because there is a bearish divergence present with the daily RSI. This is where the price makes a new High, but the RSI makes a lower high.
The next few candles after a Doji will be very important for confirming the reversal. To gain some further clarity, I included a Raindrop Chart. These charts help us visualize volume along with price. The October 4th candle is trading near the bottom of the price range, but the raindrop confirms that the late day volume put the most selling pressure on the ETF. This data suggests a confirmation of the Doji top and warns of further potential for downside.
2/ Is the Long Bond Oversold?
The Vanguard Extended Duration Treasury ETF (EDV) represents one of the longest duration treasury ETFs that I know of. The RSI dropped to 19.33 on October 3. This is potentially overextended to the downside. The RSI has only been this low 3 other times over the last 10 years. On October 24th, 2022, February 25th, 2021 and November 11th, 2016.
It appears that the bulls are trying to take back control vs the bears. Further examination of the raindrop chart indicates that this may very well be the case. The Raindrop Chart reveals that the volume is concentrated in the upper portion of the raindrop, suggesting a rather significant change in control vs the previous 2 days. Follow through from here may put the previous support levels in play as potential resistance zones.
3/ Inflation Persists
The market has been very hopeful that the FOMC will be cutting rates because inflation data, as indicated by CPI and PCE, has declined substantially from peak levels. The reality is that investors may be getting prematurely hopeful. US Retail Gasoline prices are rising once again after the decline. There has been a strong historical positive correlation between gasoline price and both CPI and PCE data.
Anyone who goes shopping or buys food can attest to the reality that food prices are continuing to climb. This not only contributes towards inflationary pressures but takes discretionary income out of investors’ pockets.
4/ Tightening Credit Conditions
US Credit Card debt has hit all-time highs. Much of this was fueled by low interest rates and easier credit standards. When consumers can more easily utilize credit, they can in theory spend more. Recently there has been a dramatic shift in the market conditions.
Credit Cards interest rates have spiked substantially. At the same time, banks are tightening their standards for credit card loans. This indicates that there may be significant drops in consumer spending, particularly discretionary spending because of deteriorating credit conditions. This can lead to slower growth, while inflationary pressure persists from elevated food and gasoline prices. This creates a unique condition called Stagflation. This is a condition that often makes the FOMC’s job much more difficult and puts pressure on economy and markets.
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Originally posted 5th October 2023
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