The S&P 500, the VIX, the Dollar, the USDCAD, and the EURUSD are all examples of market indices. Points to Consider: As the markets struggle for direction, another drop in the S&P 500 and other risk-tuned benchmarks would find a late-day recovery. Volatility is still at an all-time low, with few major events on the horizon to stoke market eddies. Fed rate expectations are still a looming underlying theme, but Treasury yields are falling and pulling away from Fed Fund futures and the Dollar, making the EURUSD range more interesting. In the midst of low volatility, another attempt at risk reversal was cut short. The jolt of volatility that greeted the US market’s return from the long holiday weekend on Tuesday didn’t continue into the current session. Despite the fact that the S&P 500 broke its seven-day bullish streak, the technical event did not result in a full-fledged risk aversion move. The index was down early Wednesday, but the ‘buy the dip’ attitude kicked in again to avoid a new lower low and, as a result, construct another, larger lower ‘wick’ on the daily candle. The systemic sentiment tipping point, whether bullish or bearish, is extremely high, and the scheduled event risk for the next 24 hours is thin and regionally specific. Rate expectations remain the most tangible theme for market-wide sentiment and relative volatility among the trackable fundamental themes still lurking in the background. This keeps interest in the major Dollar crosses alive, but given the undercurrent, it’s a theme with far more scalability. On the Tradingview Platform, a chart of the SPDR S&P 500 ETF with volume, 50 and 100-SMAs, and ‘Wicks’ (daily) was created. There was a pullback in the priority around momentum this past session when looking at the ‘quality’ of risk trends that are inching into progress on a daily basis. The Nasdaq 100 (‘growth’ index) to Dow Jones Industrial Average (‘value’ index) ratio opened with a strong jump but ended slightly lower than the previous trading days. Across the board, European and Asian indexes are forming separate ranges, while Yen crosses are trending lower, and crude oil is down for the second day in a row. There is little consistency along the speculative dimension, implying that there isn’t much pressure on risk appetite in the near future. On the Tradingview Platform, a chart of the Nasdaq 100 to Dow Jones Ratio with 10-Day ATR (Daily) was created. One of my favored gauges of the critical fundamental theme is market circumstances generated from collapsed correlation among loosely linked assets. Liquidity, volatility, and biases, on the other hand, can either foster a technical break of scheduled event risk into the dawn of a new prolific trend…or suppress it. Even though realized activity levels may be similar, volume and open interest are not as low as in previous periods known for extreme quiet – such as the second half of 2017 – This last session, the market-favorite VIX volatility indicator failed to achieve significant impetus once more, resting at 16.2. The lowest point in the market since the pandemic began was 15 late last week, but a drop to 14 would truly signal that the market has entered the’summer doldrums.’ On the Tradingview Platform, a chart of the VIX Volatility Index with a 20-Day Moving Average (Daily) was created. The FOMC Minutes Remind Us That Taper Is Coming, But When Will It Happen? On June 16th, the Federal Reserve released updated interest rate forecasts as part of the SEP (Summary of Economic Projections) that accompanied their decision to maintain the current rate and stimulus regime. A sharp hawkish shift was projected from a low probability of a rate hike before the end of 2023 to two quarter-percent increases throughout that year and discussion of a first hike in 2022. All of the monetary policy steps that would precede the first rise, including the taper schedule, would be moved forward as part of that time frame adjustment. “In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases,” according to the FOMC’s minutes from this past session. The timetable is still contingent on “significant further development,” but it’s more plainly a question of ‘when,’ implying greater proximity. Nonetheless, relative to the conviction from late last week of a certain hike by December 2022, the Fed Fund futures are still sporting a softer view. Although the decline has slowed, the Dollar continues to defy the trend. That could be interpreted as a preference for the greenback. On the Tradingview Platform, a chart of the DXY Dollar Index with an implied Fed rate hike through 2022 and a 20-Day Correlation (Daily)Chart was created. However, before I attribute the Dollar’s relentlessness to the US indices, it’s worth noting the growing disparity between the Fed Funds projection’s intensity and the US 10-year Treasury yield’s slide toward 1.30. The 10-day correlation between the two actually shifted in the opposite direction. This disparity suggests that the Dollar isn’t the stretched outlier that a one-dimensional comparison might suggest. Perhaps the stretched yield is signaling a pullback in anticipation of a softer growth outlook. While this may help to reduce the intensity of rate speculation, there hasn’t been the same level of extreme exuberance around hike speculation as there has been in the past when the economy has been overheated. Increase in US 10-Year Treasury Yields and Fed Rates Through 2022, as well as 20-Day Correlation (Daily) Tradingview platform was used to create this chart. Furthermore, in terms of US monetary policy, it is becoming less and less the extreme hawkish outlier that many continue to label it. The Bank of Canada and the Reserve Bank of Australia have both announced that their regular asset purchases will be curtailed. There have been a handful of rate hikes among the larger emerging market central banks. This reduces the potential market impact of a phased US withdrawal from extreme accommodation. In the future, keep an eye on the collective and relative sovereign bond yields. Graph of Major Central Banks’ Relative Monetary Policy Positions John Kicklighter designed the graph. The Major That Will Struggle and the Major That Can Move I’m keeping an eye on volatility but wary of trends because of the mix of provocative technical boundaries, a handy theme of US monetary policy influence, and market conditions of thinner liquidity. This is influencing my perceptions of which setups have the potential to be fruitful and which are going to the rocks. The USDCAD split still appears to be a pair of false hopes for the latter. After breaking through post-pandemic trendline resistance earlier this month, we’ve seen a follow-up move this week to break through more trendline resistance dating back to November. With 1.2500, 1.2600, and 1.2650 levels on the horizon, I’m still skeptical of a follow-through. USDCAD 200-Day Moving Averages Chart (Daily)Chart created on Tradingview Platform Those same ingredients, on the other hand, make EURUSD more fascinating. While there are pairings with narrower ranges to consider, such as the USDJPY, or other crosses that can be used to false-break fades, the EURUSD has a well-established and vast range. In July 2020, we were supposed to be at the bottom of the wedge, which starts with support. The pair is still debating whether to break or recover from 1.1800, but there is additional support down around 1.1700 and 1.1600, and tests for either would still hold the foundations of the broader trend. It’s easier to move inside a range than it is to follow through on a break. Chart of the EURUSD with 20 and 100-Day Moving Averages, as well as the 50-Day Disparity Index (Daily)Chart created on the Tradingview Platform./n
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