US Dollar has begun its decline back to new 2023 lows

Trend bullish- Expecting that minor pullbacks should prove short-lived ahead of push higher back above SPX-4500

This week’s churning in US Equities can’t yet be called complete, but a rally back over SPX-4453 would help SPX push back to 4500 and slightly above into late July.

Friday’s session proved to be far stronger for the broader market than what was evident just by viewing SPY 0.98%  or QQQ 1.55% , and Equal-weighted S&P 500 (RSP 0.04% ) was up twice as much than SPX, owing largely to the strength in Financials, Materials and Energy which outperformed all other major sectors Friday.

Even Technology fared quite well, but it was Equal-weighted Tech (RSPT 0.87% ) which was important to watch, (+0.80) while XLK 1.09%  was up just fractionally (+0.28)  as MSFT 1.80% , PANW 0.77% , MSI and ORCL 2.01%  all fell in trading.  Small-caps and Transports both showed some very positive price action this past week that is also important as a positive for US Equity markets.

Interestingly enough, despite the minor downside volatility in recent days, SPX and QQQ are still trading at fractionally higher levels than Monday’s pre-4^th of July finish.  As has been discussed, there remains no evidence of any trend change, and bullish uptrends remain intact from mid-March.

As discussed in my 2H 2023 report, the warning signs which normally would occur prior to stock indices turning down largely have not yet materialized. 

These are important:

• Evidence of Speculation and/or complacency

• Defensive strength

• Negative momentum and/or breadth divergences (Weekly are normally more meaningful)

• DeMark exhaustion

• Trend deterioration in key sectors like Technology, Discretionary or Industrials

• Seasonality concerns

• Overbought market conditions (Only QQQ is truly overbought on weekly)

• Intra-market divergence (we’re seeing the opposite, as DJIA and Transports have made steady progress to help sector rotation start to broaden out)

While actual price weakness itself is considered the most important technical “Tell”, the factors above largely remain absent, and are normally quite important to see before getting too concerned about the prospects of SPX rolling over.

As shown below, SPX might not officially be “out of the woods” but appears close. 

Two scenarios are possible into early next week. 

1) Gains continue higher to challenge and exceed SPX-4440 with a daily close over 4458 giving conviction that a move to 4500 is underway

2) Pullback under 4380 would allow for one additional period of early week drawdown early next week which should not undercut 4328 and should be buyable

In either scenario, the end result should allow for a move back to new highs for the month, and result in SPX getting back above 4500.

US Dollar breakdown looks meaningful and quite negative for the next month

The US Dollar’s breakdown Friday violated its two-week bounce attempt, making an immediate decline to test and break April lows likely in the weeks to come.

This move directly followed the weaker Non-Farm Payrolls report Friday and should result in the DXY moving to new lows for 2023.

Two-year yields seem to be holding former highs, and actually dropped following the Jobs report.  Swaps are pricing that a hike post July isn’t guaranteed, and they continue to price cuts for next year (Bloomberg).

As Tom Lee discussed in his Intraday Alert, Employment services (Temporary staffing) led the decline in Employment (-12k) and seemed to indicate the Labor market is softening.  The sharp drop in the US Dollar seems to back this up, and should be followed by a drop in Treasury yields.

Overall, I expect a steep drop in the US Dollar (DXY) over the next 1-2 months.   USDJPY likely pulls back to $137 initially, while EURUSD can rally to $1.125 along with GBPUSD likely rising to $1.35-$1.40

Dollar/Yen finally has cracked, and pullback to 137.5 likely initially

The Yen has also begun to turn higher in recent days, and USDJPY pulled back to multi-day lows on the Dollar drop on Friday, signifying the best week in two months for the Japanese Yen.

Two factors seem important for why gains might continue:

• Weaker than normal US Economic growth (Friday’s weak Jobs number seemed important)
• Japanese wages jumped more than twice the pace expected by economists, which makes a possible adjustment to the Bank of Japan’s easy policy stance potentially as early as this month’s meeting (Bloomberg)

Technically speaking, this trend break which is resulting in USDJPY hitting its lowest levels in more than two weeks looks important and bearish for USDJPY (Positive for the Yen)  An initial pullback to 137.5 looks likely in the short run.  However, breaks of this level might allow for the entire rally since March to be erased.

Gold and Silver are both steadying and readying for gains back to new 2023 highs

Real rates seem to have stalled over the last 24 hours and 10-year Real yields look to have found strong resistance near former highs.

A rolling over in real yields should be a real positive for precious metals and this seems to be in its initial stages.

As shown below, Gold has managed to eclipse the ongoing downtrend from this past May’s highs.  Gold rose +0.73% on Friday, while Silver rose +1.75%.  Copper also lifted more than +1.25% in Friday’s trading.

Counter-trend exhaustion signs are present for XAU and XME on weekly charts, and Gold’s ability to have achieved a breakout of its downtrend likely results in the start of this turning back higher.

Movement back to 2023 highs is expected, and any gains in Spot gold over 1940 should lift gold to 1986 then 2010 initially.  However, a push up above 2080 is quite likely and should directly coincide with a decline in Treasury yields and the US Dollar.

At present, both Gold and Silver look equally attractive.  These have moved in relative range-bound consolidation.  If/when Silver starts to show its relative strength vs. Gold that would make this preferable, I’ll certainly mention it in my daily update.

IAU 0.34% , GLD 0.32% , SLV, GDX 0.73% , SILJ -0.18% , XME all look interesting as ways to play a possible bounce in Gold and Silver along with the corresponding Equities.  My recent UPTICK long, FCX 2.23% , was initiated to take advantage of a 2H 2023 rally in Copper.

China likely is in a bottoming process and should also begin to lift

China likely will begin to turn higher as US/China relations attempt to thaw.  Chinese equities are trading at an usually wide valuation discount to SPX which is thought to be related to the recent antagonistic relationship between US and China.

As reported, China Premier Le Qiang is meeting the US Secretary of the Treasury Janet Yellen over the weekend, with plans for John Kerry to travel to China next week

The HSCEI, or Hong Kong China Enterprises Index ( a liquid way to invest in China vs. examining the Shanghai Index) has fallen under 6200 in a three-wave decline that looks to likely bottom out next week before undercutting late May lows at 6084.  This looks like an interesting risk/reward.

FXI, the Ishares China Large-Cap ETF has churned in consolidation since March but also appears to be closer to its recent decline from mid-June.

China looks to be trying to end its Technology crackdown with fines on Ant Group and TenCent after more than a two-year probe. This might signal that the scrutiny of Chinese technology is over, and seems like a positive from a perception standpoint.

Technically, this recent consolidation in FXI is certainly constructive. Yet a move back over $29 will be what serves as the true technical catalyst for a larger rally.  Both FXI and Kraneshares CSI China internet ETF (KWEB 2.57% ) are thought to be attractive technical counter-trend long ideas, which will gain appeal when longer-term downtrends are broken. 

Given the attempts of recent liquidity by PBOC (Rate cut)  along with attempts at thawing relations given visits by Kerry and Yellen, a big drop in the US Dollar very well could prove helpful to China’s recovery, along with signs of a rising Yen.  Price action certainly has begun to look “Less bad”, and that’s possibly a big positive given some of the catalysts listed above.