Judging from the content of my last several posts, it seems as though I’ve become obsessed with the movements of the U.S. Dollar and the Dollar Index (DXY). And while I do track the foreign exchange markets on a daily basis, rarely are they the primary focus of my attention. However, as equity and commodity markets continue to demonstrate their acute inverse correlation with the greenback, I’d be hard pressed to ignore the daily gyrations of the DXY. And, true to form, this inverse correlation showed up yet again during today’s session and helped to reverse the early session rallies seen in the equity and commodity markets. In terms of the equity markets, this was no small feat as earnings from Catepillar and McDonald’s laid the groundwork for a sharply higher move in the major indexes.
With today’s close of 1,180.26 on the S&P 500, equity investors once again failed to sustain a close above the 1,181 level. Having failed in this attempt 4 out of the past 5 opportunities, it’s clear that the bullish sentiment that has been the hallmark of the recent rally is waning. To an extent, this is a product of investor focus on the Federal Reserve’s upcoming monetary stimulus package and its associated details, but with generally positive corporate earnings being released on a daily basis the lack of follow through buying is more symptomatic of a market that has reached a near term top.
After trading either side of unchanged for the early part of the trading day, gold prices dropped once again. While partly due to the intraday bounce in the Dollar Index, the yellow metal’s inability to recoup a significant portion of Tuesday’s decline points to a market that is currently bereft of buyers. Whether or not outright sellers begin to appear remains to be seen, but I think it’s now clear that gold is experiencing the near-term correction so many have been looking for. I continue to look for the pullback to test the $1,250 level, though a test down to the $1,180 area is certainly not out of the question. My gut tells me that if the selling pressure remains fairly orderly, as has been the case this week, testing $1,180 will prove to be the more likely scenario since bottom fishers will be less inclined to buy a systematic decline.
One final thought. Treasury yields, especially those on the long end of the curve, climbed throughout today’s session. Thirty year bond yields rose more than 5 basis points to 3.9446%. And while this was to be expected given the early strength in the equity and commodity markets, the fact that a more sustained bid did not enter the marketplace was a bit surprising, yet also telling. With the Fed clearly stating that it will be buying long-dated Treasury securities in the near future, there should be a natural put in bond prices for the foreseeable future. However, if the scale of the purchases fails to live up to the expectations bond investors have built into yields, there should be some room for rates to rise if/when expectations shift. In light of the Dollar’s intraday strength, gold’s general weakness, and equities inability to close at a new high, I think the Treasury market is confirming that investors may have experienced a bout of ‘irrational exuberance’ in estimating the size of the upcoming intervention. That this concern is being echoed across so many other markets is also worth noting.
On a more personal note, this will be my last post until Wednesday. My wife and I are headed for the Oregon wine country for a much needed vacation, which means that I likely won’t have the time nor the clear thinking needed to write a coherent post until I return. I’ll have a laptop with me to keep up with things, but the markets definitely won’t be my primary focus as usual. As always, thank you very much for your readership and I promise to come back refreshed, renewed, and ready to pontificate as usual.
Until Wednesday…..
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