Talking Points: S&P 500, NFPs, and ADP, USDJPY, AUDUSD, and Gold On the one hand, the S&P 500 finished with a 66 percent gain in five quarters, the largest rally since WWII; on the other hand, the S&P 500 finished with a 66 percent gain in five quarters, the largest since WWII. Daily activity has dropped to its lowest level in 18 months. Month-end flows appeared to be contributing to some volatility in the Dollar and Yen crosses, but the upcoming NFPs and a holiday weekend are making trading more difficult. While Fed rate speculation is amplifying event risk such as changes in ADP and NFPs, as well as the ISM manufacturing index, the AUDUSD and USDJPY setups are complex. Trading in the First Half vs. Just This Week is a stark contrast. The month of June, and so the first half of 2021, has come to an end. This marks the start of one of the most spectacular recoveries – from a severe drop into a bear market – since World War II for the S&P 500. The large picture perspective, however, does little to release us from the liquidity constraints we’ve been dealing with this week. While the broad US index finished at a new all-time high for the fifth trading day in a row, the level of activity behind the course setting remained exceedingly low. On a historical basis, the past two-day range is the smallest band of price activity (as a percentage of spot) since December 2019 – and nothing equivalent before that until the absolute stillness of 2017. The six-day average true range (ATR) as a measure of realized volatility has the same historical standard. I’ll emphasize that this is exceedingly quiet, and it’s unlikely that we’ll be able to keep it up for much longer. Even before the NFPs, a break from these high levels is a possible possibility. When the context is thus confined, though, a ‘break’ does not have to be enormous. Chart of the S& As we move through the slowdown in activity brought on by NFP expectations and an extended holiday weekend in the US, it’s useful to look back at the performance of a benchmark like the S&P 500 over a longer period of time. The index only increased by 2.2 percent on a monthly basis, but that was enough to set a new high. On a quarterly basis (a three-month rolling timeframe), however, the picture is even more remarkable. The 8.2% gain in the second quarter is great, but the overall 66 percent gain from the end of the first quarter of 2020 (a five-quarter gain) is the fastest since the second quarter of 1936. The parallels are instructive. The bull trend we’re still seeing today is a comeback from the global coronavirus outbreak’s sudden, forced economic confinement. The last time something like happened was during World War II. The scale of the ascent was proportional to the collapse that came before it in each case. The question is whether the rebound will become a full-fledged emerging trend. S&amp Even if event risk is still present, its ability to move markets is limited. While month-end and quarter-end activities caused some short-term volatility in the previous session, there is an event risk that has the capacity to move the markets. However, overall market conditions limit the ability to have that impact. The June private payrolls report from the United States was released this week. ADP outperformed expectations with a 692,000-report, well over the 600,000 expected. The Dollar was trending higher on Wednesday, so this data could have helped to the positive sentiment. However, I feel the weight it would add would be minimal at best. In the past two months, the ADP’s initial monthly report has consistently lagged behind the official NFPs update. This raises major doubts about the ramifications for Friday’s official payrolls (currently forecasted at a 700,000 increase). Changes in ADP and NFP Payrolls in Relation to Differences (Monthly) Data from ADP was used to create this chart by John Kicklighter. Before we get to the fireworks on Friday, there is one more high-profile event on the US calendar that fundamentalists should keep an eye on. Although I believe the ISM service sector (‘non-manufacturing’) activity report is the strongest overall predictor for US GDP, the manufacturing statistic nevertheless influences economic health and inflation predictions due to upstream price pressures. For the sake of market impact, I’ll interpret the signal as a gauge of pressure on the Federal Reserve to accelerate its hawkish policy shift or alternatively give them leeway to delay. A good reading would be a boost to the Dollar and a burden to risk assets in general, as it could point to a more imminent taper announcement. S&P 500 Index Overlayed with ISM Manufacturing in the United States (Monthly) Data from the Conference Board was used to create this chart, which was created by John Kicklighter. Gold has had its worst month in years as a result of the dollar’s rally, which has pushed enticing technicals. Whether you think the fundamentals underpinning the Dollar’s rise are sound or not, there’s no disputing that several of the majors are in an appealing technical position. The daily or weekly picture of the AUDUSD is one of the most loaded charts in the market. This pair fell through the 200-day moving average and neckline of a head-and-shoulders pattern that had been forming throughout 2021 after the FOMC rate decision on June 16th. After the break, however, there would be no follow through, and the rebound would test the limits of what qualifies as ‘previous support as new resistance.’ Even if the exact level did not hold, I believe there is enough development to hang onto for market players. With this liquidity, though, continuing this slide constructively before the week finishes appears highly unlikely. Chart created on Tradingview Platform of the AUDUSD with 200-Day Moving Averages (Daily). Compare the AUDUSD against the USDJPY. The range high of 111.00 represents a Fibonacci level (38.2 percent of the June to December 2016 rally), but there isn’t much depth beyond this point. Even with full liquidity, the existence of technical overhead every hundred pips or so during the previous five years has made a clean run tough to execute. Market depth is included due to seasonal limits, and range appears to be the more practical backdrop. However, with continued mild Dollar or ‘risk’ volatility, a short-term break is feasible; however, follow-through is unlikely. On the Tradingview Platform, a chart of the USDJPY with 200-Day Moving Averages and a 1-Day Rate of Change (Daily)Chart was created. When we think of the Dollar’s performance, we usually think of pairs like EURUSD; nevertheless, the world’s primary benchmark for pricing is also a key factor in commodities pricing. As a result, it should come as no surprise that, although the DXY Dollar Index had its highest month of recovery (2.8 percent) since November 2016, Gold had its worst month of loss (-7.1 percent) in the same time period. Looking beyond our current catastrophic liquidity crisis, as market rates and interest rate expectations grow in the United States and around the world, this anti-fiat commodity will become increasingly expensive. On the Tradingview Platform, a chart of Gold Futures with a 20-week moving average, volume, 1-month ROC, and COT (Monthly)Chart was created./n
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