Chart Advisor: Dollar Drive – Bond yields and the U.S. dollar rip higher as risk assets slide.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Monday, 26th September, 2022

1/ A Quarter Century of Sideways Prices

2/ No Confirmation for Rates

3/ Long Way Down for Lumber

4/ BOJ Draws the Line

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1/ A Quarter Century of Sideways Prices

We often use the Value Line Geometric Index (VLG) as a representation of how the average, or median stock is performing. While the S&P 500 might provide a better illustration of the performance of an average portfolio of stocks, the Value Line shows us the performance of the average security. 

Source: All Star Charts, with data provided by Optuma

With prices cratering back beneath key prior-cycle highs, the outlook isn’t bullish. The Dotcom bubble and pre-2008 Financial Crisis highs are as important as any level in the stock market right now. If price falls below this key support level, downside risks could be elevated.

The fact that the median stock has made no progress since its 1998 peak nearly 25 years ago tells you about the damage the overall market has endured. As long as VLG is below these key former highs, we could expect further downside.

2/ No Confirmation for Rates

While yields have been ripping higher across the board, we haven’t been getting confirmation from the stock market. Below, we’re looking at the Equities For Rising Rates ETF (EQRR) overlaid with the U.S. 10-year Treasury yield (TNX).

Source: All Star Charts, with data provided by Optuma

These charts tell us two things. First, even the stocks that tend to do well in a rising rate environment are being overwhelmed by selling pressure and are not confirming the new highs in yields. Secondly, investors are seeking safety and avoiding even the strongest areas of the market. When we combine the two, the message becomes clear: Stocks could continue to struggle as long as yields keep rising.

3/ Long Way Down for Lumber

While the majority of commodities peaked in March and April of this year, lumber has been sending us warning signs since the first half of 2021. Lumber peaked in May of 2021, crashed by 70% into the summer, and nearly rallied all the way back to new all-time highs before rolling over again this year.

Source: All Star Charts, with data provided by Optuma

Not only is the economically-sensitive commodity in a 75% drawdown from its peak, it just took out its pivot lows, as well as a critical shelf of former highs dating back to the 1990s. If price fails to reclaim the 460 level, it could confirm serious structural damage. This would be the latest piece of evidence favoring commodity market bears.

4/ BOJ Draws the Line

The USD/JPY has been a key focus in forex markets this year, with the yen falling over 3,000 pips since May. The Bank of Japan (BoJ) stepped in last week and bought yen in the open market for the first time since 1998.

Source: All Star Charts, with data provided by Optuma

The move may have drawn a line in the sand for the yen, in the 145-147 range, a level that happens to line up almost perfectly with the 1998 highs. The BoJ is unwilling to let the yen depreciate beyond that level. 

Originally posted 26th September, 2022

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