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Excuse Me!



Anytime the market is into support and has been down sharply, near-term oriented market participants look for excuses or reasons to become a buyer.

Many trading desks and investors like to go against the prevailing trend thinking that if something is down sharply and near support an oversold bounce can't be that far away. The key is to identify the excuse as it is developing. Obviously, a single news item can't be identified, but there are always topics that, while old, can find their day in the sun.

The opposite holds true for a market that has rallied significantly off the lows and is near resistance. Near-term participants look at the gains and begin looking for excuses or reasons to get out. These individuals also know the trend is your friend and there is no reason to fight it until an identifiable reason emerges.

As you know, Brian Reynolds and I have been beating the drum about the interaction of the currency, fixed income and equity markets over the past few months. If you need any evidence, look at what happened in the middle of March on the below three charts. I have outlined how the U.S. Dollar Index was diverging from the trend of the 10-year note yield and equity markets. The Dollar Index was at the lower end of the range, while the note yield and S&P 500 remained stalled at the upper end of the range.

When intermarket correlation is as high as it has been in recent months, this divergence is important and could be resolved in one of two ways: either the dollar rallies to the upper end of the range to meet bond yields and stocks or they move to the lower end of the range and meet the dollar.

The problem now is that the U.S. Dollar Index has totally broken down, as shown in the first chart below, and bond yields and stocks appear to be losing momentum at the upper end of the range, as the second and third charts show. So now one of two things happen: bonds and stocks lose their tight correlation to the dollar, or money flows into bonds and out of stocks bringing the 10-year note yield and S&P 500 closer to the lower end of the range.

If near-term market participants are looking for an excuse or reason to take profits, they now have an identifiable one in the U.S. currency weakness.

The U.S. Dollar Index has clearly broken support


Bond Yields are moving back down

Source: Baseline

Stocks could be next to pull back if intermarket correlation remains high

Source: Baseline

Finally, I am extraordinarily excited about the University and our opportunity to reeducate ourselves and all the Minyans. Funny how that works...every time I attempt to educate, I learn more than I taught. Take a look at the following incredible line up of Department Heads and Professors:

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Daisy --- To the Dean's office!!!
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