/ July 14 / Weekly Preview
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Monday:
N/A
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Tuesday:
Core Inflation Rate YoY (3.0% exp.)
Inflation Rate YoY (2.7% exp.)
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Wednesday:
PPI MoM (0.2% exp.)
Industrial Production MoM (0.1% exp.)
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Thursday:
Retail Sales MoM (0.1% exp.)
Initial Jobless Claims (234K exp.)
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Friday:
Building Permits Prel (1.39M exp.)Housing Starts (1.3M exp)
Michigan Consumer Sentiment Prel (61.4 exp.)
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Monday:
N/A
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Tuesday:J P Morgan Chase & Co
Wells Fargo & Company
BlackRock, Inc.
Citigroup Inc.
The Bank Of New York Mellon Corporation
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Wednesday:
Johnson & Johnson
Bank of America Corporation
ASML Holding N.V.
Morgan Stanley
Goldman Sachs Group
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Thursday:
Taiwan Semiconductor Manufacturing Company Ltd.
Netflix, Inc.
Abbott Laboratories
Interactive Brokers Group, Inc.
Elevance Health, Inc.
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Friday:
American Express Company
The Charles Schwab Corporation
Schlumberger N.V.
Regions Financial Corporation
Zero Fear
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The S&P 500 closed out the week in positive territory, marking another strong performance near record highs. There were fresh all-time-highs recorded on Thursday, but the rally lost some steam on Friday as investors grew cautious ahead of key inflation data and Trump’s most recent tariff announcements.
However, there are few signs of real stress underneath the hood, as the options market points to subdued volatility in the week ahead. GEX remains broadly positive across all key instruments and the VIX index finished the week at 16. Implied volatility for SPY is 6.17% 1 month ahead and 10.92% 3 months out. At the 3-Month interval, the IV premium is just 1%, signaling that excess volatility in the medium term is not expected.
Looking back, a lot of the market’s risk taking attitude stems from renewed optimism that the Federal Reserve could cut rates as soon as September. There seems to be a growing willingness among FOMC voters to ease rates, as long as inflation data behaves. Fed Funds futures now reflect roughly a 65% chance of a September cut.
High risk plays like AI-related equities and crypto have boomed. NVIDIA, Broadcom, and Arista Networks extended their gains as investor demand for AI infrastructure remains strong.
However, tech stocks were not the ones really outperforming lately. There was also a rotation into cyclical sectors that started last week, with relative-to-SPY weekly returns favoring Energy (XLE), Transports (XTN), Utilities (XLU) and Industrials (XLI).
It’s starting to look like investors are looking beyond megacap tech names and broadening their horizons. Financials (XLF) underperformed as Q2 earnings season officially kicks off on Tuesday with results from major banks including JPMorgan, Citigroup, and Wells Fargo.
Technically, the market is now priced for perfection, with little margin for error — not the best technical setup ahead of an earnings season start. At this point, any catalyst from economic data or weak earnings guidance could trigger a pullback. Given that we are trading in a strong bull market, that pullback would not be excessive. Still, the probability for increased volatility remains high, as the market has struggled repeatedly to break above M-Trend resistance now at $627.
The 20-DMA at $610 should contain any earnings related correctionary process.
A recent CNBC article highlighted the U.S. dollar’s worst first-half performance in 52 years. While that certainly sounds alarming, the proper perspective is mis-read in our view. Dollar bears calling for the greenback’s continued demise argue for narratives such as “de-dollarization” and “death of the SWIFT settlement system” in favor for a BRICS or crypto alternative. They posit that that the dollar will lose its global reserve currency status in the foreseeable future.
Such claims miss important context and are only useful to justify an -8% pullback from all-time highs. There have been several such narratives pushed throughout the years, starting from 1976. Every time extremes in sentiment and positioning were reached, the dollar rallied and maintained a bull market in relation to other global currencies.
While there are many flaws with the U.S. economy and its dollar, the other options are simply not viable at the moment due to several reasons:
Strength of the US economy vs peers
Financial network effects and global adoption inertia
Limited scope of de-dollarization efforts
Resilience amid policy changes
The U.S. Dollar Bull ETF (UUP) has fallen sharply from its 2024 peak, but recent price action shows signs of exhaustion in the selling. At -1.37 standard deviations from the 2 year mean, and trading near November 2023 levels, multiple momentum indicators have become deeply oversold. Such previous conditions have created the conditions for a bullish reversal.
Moreover, positioning in futures markets shows that speculative traders are heavily shorting the dollar, which could set the stage for a powerful short-covering rally.
To a certain extent, Dark Pools traders have already picked up on a potential reversal in UUP, as an accumulation trend is taking shape. The latest buying index for UUP was 59%, compared to 44% for the 3-Month average.
With real yields higher than Europe and Japan, the setup is attractive for large international wealth funds and sovereign governments which would receive a double benefit of currency gains and higher bond prices.
The only issue is that dollar rallies are usually associated with equity market weakness. In the Signal Trace chart below (coming soon to all Signal Sigma users), we’ve mapped points in recent history where the dollar’s trend (bottom panel) has reversed and rallied significantly. 5 out of 7 such instances resulted in lower equity prices and higher volatility in the near future.
This oversold dollar predicament as well as extreme investor complacency ahead of Q2 earnings season is potentially problematic. The nearly 25% rally from the April lows is one for the history books, but despite that strong performance, markets are reaching unsustainable levels, both in price as well as sentiment.
According to our own metric, sentiment has topped in late May and waned a little since then, on reduced momentum. There is still some upside possible until we reach extreme readings once more, but a normalization is more likely than not.
When mapping extreme sentiment readings with our previous dollar reversal study, we find that the two signals are found within close proximity to each other. As discussed, more often than not, near term equity returns tend to be flat or negative.
Our Trading Strategy
As is many times the case, the majority of investors can find themselves positioned for the same outcome. In our case, that is an assumption of continuous gains with little margin of error. Any unexpected negative catalyst can cause a reversal because there are no marginal buyers left to support prices. That’s when crowded trades begin to unwind simultaneously.
At the moment, the primary trades to unwind are excess optimism in equities and excess bearishness in the USD.
We will take the following portfolio actions this week:
Trim winning positions
Maintain a core exposure to less risky names and instruments
Raise stop loss levels
Monitor developments especially on the inflation and earnings fronts
While adjustments are likely to be minor, it’s small steps that can have a large impact over time when compounded.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!
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The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.