The action in the broad stock market has been quite benign recently…as the S&P 500 index has traded in a range of less than 1% this week…and a range of less than 1.4% since Monday of last week. We’d also note that the average daily volume the past two weeks has been the 3rd and 4th lowest of the year. Only a week in early June and one in early July had lower average daily composite volume than the past two weeks. So even though the stock market remains at a critical juncture…and the S&P 500 moves from slightly below the 3,000 level to slightly above it from day to day…we’re not getting many hints as to which way it’s going to break at this critical juncture…at least not yet.
That’s not to say that the stock market has been boring. In fact, just the opposite has been true…as many individual stocks have seen some very large moves after reporting their earnings. If there was anything to be encouraged about, it was that a couple of big names (like BA & CAT) held-up will in the face of pretty bad earnings reports. However, it’s usually not until we’re 3/4 of the way through earnings season (and the forward guidance that goes with it) before we get a good idea of where we stand on this key fundamental issue.
Moving to the currency markets, after a wild week last week, the dollar has calmed down this week. However, the DXY dollar index has calmed-down at the its 200 DMA…which has been a key support level for the greenback all year. (It actually fell below it for just over a week in late June, but quickly regained that line, so it’s still an important support level to watch.) Having said this…and as we’ve highlighted several times recently…even if the DXY does indeed break below the 200 DMA, it would probably have to break below the 96 level (its lows from March & June) to confirm a change in the intermediate-trend in the dollar.
The reason the we’re highlighting the dollar again this morning is because the EEM emerging markets ETF is definitely one of the most sensitive markets to moves in the dollar…and it is testing a key level in the other direction (a key resistance level). The EEM is now testing a trend-line from almost two years ago…from its early 2018 highs. (That line is also the top-line of either a “symmetrical triangle” or a “descending triangle”…depending on how you look at it.)
Either way, it’s a two-year line…and since the EEM has actually broken slightly above that line, it’s a positive development on a technical basis. It’s going to have to break more meaningfully above that trend-line to make it a more compelling development…AND it’s going to have to break above its April highs to confirm an intermediate change in trend. However, if the dollar breaks below the 96 level at the same time the EEM is breaking-out above its 2019 highs, it’s going to be a VERY, VERY important development.
Something like the scenario that we just laid-out is not going to take place overnight, but it’s something investors will NEED to keep an eye on over the coming weeks and months. As one very smart fellow we know said recently, the “long U.S. assets” is probably the most crowded trade from around the globe right now. So if that dollar breaks-down, it’s going to catch a lot of people offsides.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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