US Dollar is Likely in Early Stages of Q1 Risk Off Bounce
2021 Technical Outlook Webinar replay (click here) – If you missed my 2021 Technical Outlook Webinar this past week, I’d encourage you to watch the replay. In addition to outlining the longer-term cycles I view as important, along with expectations for rates, currencies, and commodities, I also discuss the reasons why investors should be prepared for a 2-3 month pullback in Q1.
A Q1 pullback would set the stage for another upside move in 2021 – To be clear, I continue to view a Q1 equity pullback in the range of 7-10% to be a normal event that develops during most years and NOT the beginning of a major bear market correction. The longer-term 4-year cycle work I discussed during the webinar suggests equity markets are likely to move higher in 2021 following a temporary pullback in Q1.
Early signs the US dollar is beginning a temporary, risk-off, counter trend Q1 bounce – The decline in the US dollar since Q2 2020 has been one of many tailwinds for risk assets such as equities and specifically for cyclical stocks. In addition to the weekly momentum indicators I expect to peak in Q1, the behavior of the US dollar is likely to be an important ‘tell’ for risk assets. As I discussed in the webinar, the longer-term trend for the US dollar remains negative BUT a counter trend bounce is likely in Q1.
Why? The weekly chart of the US Dollar below illustrates the dollar having already corrected to its next support band between 88-89, near the 2017 lows and just above a 50% retracement at 87. I am expecting a temporary bounce from current levels that is likely to be part of an overall pause or pullback in risk assets.
Zooming into the shorter-term daily chart below, we can see the last move lower is the DXY’s third down leg from the March highs, which is often the point a counter-trend bounce develops. Expect a rebound to be relatively short lived and likely to stall at the 92-93 the resistance band by late Q1/early Q2.
Figure: Weekly Sector Review
Source: Fundstrat, FactSet
- No meaningful changes to our sector outlook this week.
- Growth sectors, technology and consumer discretionary remain range bound with longer-term uptrends.
- Cyclicals continue to rebound but are showing very early signs of starting a short-term pullback as the US dollar bounces while defensive sectors are showing early signs of bouncing.
- Healthcare is noteworthy given its relative performance continued to strengthen from oversold levels this week above its 50-day relative performance moving average.
Figure: Best and worst performance sectors over past 3 months
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