“The time has come,” the Walrus said,
“To talk of many things:
Of shoes–and ships–and sealing-wax–
Of cabbages–and kings…”
“I am the Walrus
Enjoy yer bird, gang!
We’re monitoring two separate trends in the market as the turkey gets served this year. The first is the action on the dollar. And the second is what appears to be a creeping interim rollover top in the making.
Wanna make something of it?
The dollar has been getting tremendous inflows of late – just like we said it would – and mostly a result of the relative uselessness of the rest of the world’s currencies.
The CFTC’s latest data show a growth in net bullish dollar longs to unprecedented levels – a full, fat $48 billion is now betting on continued U.S. economic growth. This is also the first time since the bull market began in March, 2009 that the dollar has seen net long positions against all eight of its currency peers.
Consider – a Japanese recession, possible Eurozone deflation and an ongoing Chinese slowdown, and why in the world wouldn’t you go long the buck.
Itchy Trigger finger…
The way things are going, they’ll all be worthless one day.
Not that we have anything against toilet paper. As far as twentieth century health-related inventions go, we’re rather happy for its advent. But we absolutely quiver at the thought of it being replaced by a Yuan or a Euro or some other such rough, unyielding pulp.
And we’re equally circumspect about piling into a dollar trade now, stained as she is by the following technicals –
But not only that. When a weekly chart also shows an overbought RSI read (in blue), one has to be prepared for an extended move sideways, at best – an outright decline, at worst.
We should add that the daily chart (below) is also soaring wildly above its moving averages, and there’s a significant bearish divergence in the making between price and the RSI and MACD indicators (in blue).
Have a gander –
In short, between the weekly and daily charts we have a clear picture of overreach that we believe will soon set the hedgies and other speculative dollar longs on edge. As far as we can tell, there’s little more that the current run can be stretched before we get a noteworthy backlash.
Creeping Interim Rollover Top
As for the creeping interim rollover top we alluded to earlier, we’ll offer you this chart of the Dow, which we believe speaks directly to the growing risk of a general pullback in the indexes.
The tightening intraday action and rounded shape of trade over the last three weeks (in red) smell fishy to us. Beyond that, RSI is calm…too calm, and MACD will cross lower today or tomorrow (in blue).
This is experience talking more than anything else. But we wouldn’t be surprised if we saw a pullback in equities that drew the buck lower in its wake – temporarily to be sure – but lower.
There’s a Walrus in my Pumpkin Pie!
When I was a kid we had an expression that I’ll be damned if I understand today. We called it ‘pulling a walrus’, and it was used whenever somebody got overly excited about a mundane matter. We’d say, “Calm down – no need to pull a walrus,” or something like that, and the message was clear. You were overreacting.
That’s precisely what’s happened with the dollar of late and potentially with the stock market, too. They’ve pulled a walrus.
We say look east. Far East, that is, to China, where the market is getting stoked and a strong U.S. Dollar is making customers look elsewhere for cheap goods (read: China).
The technicals for the iShares China Large Cap ETF (NYSE:FXI) look like this –
In the first place, the latest action is very strong, situated as it is above all the stock’s moving averages (red circle). The erratic nature of the trade will have to settle, of course, and when it does, we expect the trend to remain higher.
We also see both RSI and MACD trending above their waterlines, lending further support to the likelihood of continued strength.
Our preference would be to sell near term PUTs below support at the long term moving average ($37).
Lots of them.
As the dollar and (potentially) equities cool off, China will be the focus of the walrus.
Many happy returns,
Matt McAbby, Senior Analyst, Normandy Research