Short-term trends in US Equities remain bullish but could face some consolidation starting this week, potentially, given a combination of slowing breadth following the steep run-up to overbought territory. Treasuries and the US Dollar look to be close to inflection points, which could drive both Yields and the US Dollar back to new monthly lows. Emerging markets should begin to strengthen as DXY rolls over, and I expect to see precious and base metals also start to gain in relative strength in the weeks ahead. At present, despite SPX having reached an area which looks important from a price perspective, time factors still look somewhat premature in signaling a potential top. For now, price has not given any indication of breaking its uptrend, and until this happens, it remains right to stick with this trend. I anticipate that a push higher in Technology this week should begin to find resistance, and that breadth could show some signs of waning this week.
As shown below, there remains no evidence of any trend reversal, and Moody’s debt downgrade failed to take either Treasuries or Equities lower, with both reversing early day weakness by Monday’s close.
Market breadth finished flat despite the late-day recovery, and despite 8 sectors finishing positive on the day, Technology’s weakness resulted in breadth finishing flat.
As seen below, there will need to be some evidence of trend reversal in Equities that breaks the current uptrend to have some indication of a possible consolidation. While I sense this does happen into early to mid-June, I’m skeptical at this time that peaks are yet on place.
If my thinking is right, the next few days should begin to show more evidence of market breadth drying up and could be joined by DeMark-based exhaustion signals sometime this week. At present, trends remain bullish for US Equity indices, and no evidence of any trend reversal.
S&P 500 Index
US Dollar looks to be close to turning back down to monthly lows
Technically, a decline in the US Dollar index (DXY) back to new lows looks likely in the months ahead, which should take DXY lower to test and break April lows at $97.92.
Its recent recovery has not been too compelling technically speaking, and seems to be starting to fizzle out over the last few days.
Even as Treasury yields started to bounce more rapidly last week, the Dollar fell almost 2% vs. the Japanese Yen. Furthermore, ECB President Lagarde seemed to support a further rally in the Euro, calling it an “opportunity”.
Option premiums paid to hedge against a decline in the US Dollar vs. a basket of peers (relative to positioning for gains) reached the highest levels since 2020. The decline to multi-year lows in one-month risk reversals on the Bloomberg Dollar index (not shown) point to more weakness in the Currency, even after a 6% decline this year.
As daily DXY charts slow below, $100 looks to be a key technical area, and undercutting this should help pave the way to declines to 97.92. Under this level likely would result in a selloff to either 95.85, or 94.41, each representing an alternate Fibonacci-based projection from the decline that began in January 2025.
U.S. Dollar Index
Dollar Yen should break 144 in the weeks to come, leading down to 137
USDJPY looks quite vulnerable in the months to come and appears to have already peaked out after its bounce from April into mid-May.
Following five straight days of decline, USDJPY should be on the verge of a larger breakdown, and any consecutive daily close under 144 should not find much support until 139.
However, it is likely that this pullback from 5/12 might extend lower to reach a 61.8% percentage alternative Fibonacci projection of the decline from January. This should intersect near 137 and could provide some support on weakness.
U.S. Dollar / Japanese Yen
Ishares MSCI Emerging Market Index Fund (EEM) is likely to gain further on a US Dollar decline
One area that stands to benefit as the US Dollar starts to turn back lower could be emerging markets, which had broken out a few weeks ago to the highest levels since last October.
Mexico, India, and China have all pushed higher in recent weeks, and EEM looks poised to test and exceed the prior highs from last Fall in the weeks ahead.
Technically, the area at $49 looks possible to materialize as an upside target, lining up with a 61.8% Fibonacci retracement ratio of the selloff from February 2021 into October 2022.
Above $49 should lead to gains to $53, but likely could represent a stronger level of resistance to gains into this Fall.
Overall, EEM looks attractive and should benefit if/when DXY pulls back to new monthly lows in the weeks to come.
iShares MSCI Emerging Index Fund
