The argument has been that once the CRB Index reaches the 200-day e.m.a. the dollar tends to be at a peak but the counter argument is that on many occasions tech stocks like INTC reach a top at the same time as the dollar. Since it seems hard to believe that Intel’s rally from roughly 17 to 18 marked a ‘top’ we had to wonder how the markets would sort this one out.
The answer appears to be through a sufficiently quick rise in the CRB Index. Now that it is no longer on the support line at least some of the near-term pressure on the dollar can ease allowing the dollar to (hopefully) build to new highs until both it and INTC reach the next intermediate-term peak.
Another short-term view of Intel and the Cdn dollar is shown below. The idea here is that INTC has been making a potential bottom concurrent with the Cdn dollar making a top. Essentially INTC’s trading below 20 has gone with the CAD holding above roughly .8880.
We argued that crude oil prices declining from 75 down to 68 would be a negative for the equity markets while a decline from 68 to 60 would likely be a positive. What happened instead was a day after day after day rally in crude oil prices back to 75 that helped lift the broad market higher as the XOI/SPX ratio rose from .82 to .92.
Our near-term problem is that the ongoing trend includes equity markets weakness each time crude oil prices begin to decline. Why? Because the commodity stocks are, in many ways, ‘the trend’.
Short Term Views We have argued (again and again) that short-term interest rates will not peak until copper and crude oil prices stop rising and turn lower. The issue at the moment is whether a top has been made for energy and metals prices or whether the recent correction is merely another mid-cycle consolidation on the way to higher and higher prices.
We are trying to show through the chart that the recovery in the dollar from mid-May into mid-June went with weakness in energy and metals prices. One of the keys over the next few days will be whether the dollar can push back above 86.50 because... that would certainly argue in favor of lower commodity prices followed by a top for short-term yields.
The idea is that the action in metals and energy prices is in some way reminiscent of the stock market’s top in 1987. Prices surged to a major high and then fell sharply for roughly a month before turning upwards once again. The rally phase lasted through the first few days of the new quarter and then prices quickly broke lower.
The U.S. employment report is due out this morning and, as usual, it has the potential to roil the markets. We have no idea whether this is ‘the news’ that the markets are concerned about or whether it has something to do with the prospect of Japan raising short-term interest rates next week. Our argument, however, is that IF the markets react today by pushing the U.S. dollar sharply higher THEN copper and crude oil prices look lower. In a perfect world one of two opposing markets- bonds or crude oil/copper will be substantially lower between today and the final week in July.
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