Ama Dablam peak at sunset.
The stock market recorded sharp gains last week with the Nasdaq Composite up over 5% and the S&P 500 gaining 4%. It was a broad-based rally as the Technology Select (XLK
Technology Select Sector SPDR Fund
Consumer Discretionary Select Sector SPDR Fund
Before last week’s economic data, recessionary fears had been building based on the increase in unemployment claims and softening data like the ISM Manufacturing Report. Since the 2 Year T-note started yielding more than the 10-year T-Note in early July 2022 there have been many warnings about the inevitable recession due to the inverted yield curve. This is the longest inversion since 1978 according to Deutsche Bank.
2-Year T-Note Yield
Often the completion of weekly top or bottom formations can have wide-ranging effects that can last for months if not longer. The sharp rally in yields began in late 2021 as the yield on the 2-Year T-Note rose from below 0.5% to 5.063% in March 2023 as the Fed raised rates 11 times. The yields reached their starc+ band (LS) in early 2022.
The 2-Year T-Note yield made a new high in September 2023 (Head) before again turning lower at the end of the year. This coincided with the start of the stock market rally in November. The year-end low in yields created a key level of support at line a.
Yields formed a lower high in May 2024 as they failed in the 5% area (RS) and below the prior high. The uptrend from the early 2024 lows, line a, the potential neckline of a head and shoulders top formation was broken in July
The MACDs have been negative since June after forming a series of lower highs, line b, that indicates a pattern of declining momentum. This is consistent with a top formation. With yields now at the weekly starc- band a rebound or stabilization of yields is likely in the next few weeks.
US Dollar Weekly
The lower yields have been weakening the value of the US Dollar which peaked in September of 2022 at $114.77. By July of 2023, the dollar reached a low of $99.58 which was a decline of over 13%. The rebound in the dollar reached the 50% resistance of the decline at $107.22 in early October of 2023, line a, as the stock market was trying to complete its correction
The dollar’s rebound in April 2024 failed below the prior rebound highs and the key resistance level. In July the support at line b was broken as the dollar generated a weekly doji sell signal (see arrow).
The dollar is now testing the year-long support (line c) but is oversold as it has traded below its weekly starc- bands for the past three weeks. The declining 20-week EMA (in yellow) is at $104.02 and should limit any rebound.
A decisive break of this support is likely to be accompanied by even lower yields and likely an even higher stock market. If this decline from $107.22, equals the decline from the 2022 high, line a, then the potential downside dollar target is at $91.86, line d.
Spyder Trust (SPY)
So what about the stock market? The prevailing opinion heading into August seemed to be that the seasonal outlook was negative, the Fed had waited too long to cut rates and recessionary fears were building. In the latest BofA survey, the hedge fund managers reported that they had reduced their stock holdings and raised cash.
The Spyder Trust (SPY
Principal Shareholder Yield Index ETF
SPDR S&P 500 ETF Trust
The S&P 500 Advance/Decline line was moving higher as the SPY was correcting and made a new high on July 26, 2024, line d. This again projects a new high for the SPY and the Nasdaq 100 Advance/Decline line has made a similar bullish projection for the QQQ
Invesco QQQ Trust
This analysis supports a bullish outlook for stocks heading into the end of the year with bonds also likely to move higher as yields decline. A rebound in yields and a bounce in the dollar may contribute to choppy trading in the stock market over the next few weeks. This is likely to present more good buying opportunities.
