What Leads Dollar and S&P 500 to Stop Flirting With Volatility and Break Congestion?


S&P 500, VIX, Dollar, Recession and Earnings Talking Points:

  • The Market Perspective: S&P 500 Eminis Bearish Below 3,900; USDJPY Bullish Above 127.00
  • Despite some provocative risk of an event (China GDPBOJ decision) and some bouts of sharp volatility (USDJPY, S&P 500), the broader market avoided conviction
  • As the benchmark US index teases another 200-day SMA break and the DXY holds its extremely narrow range, a run of highest event risk in the coming week raises the stakes for breaks.

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We closed the third week of the new business year, but the return of liquidity did not bring with it a sense of conviction of the speculative rank. There remain underlying conditions that act to underline a full sentiment charge – whether it coalesces around a bullish or bearish view. Seasonal norms for activity and performance of benchmarks such as the VIX and S&P 500 respectively are not particularly conducive to trend development, but the more general imbalance of anticipatory overriding reaction has been a more tangible influence. The event risk this past week simply did not rise to the occasion to definitively tip the scales of conviction behind risk trends. From the Chinese 4Q GDP update to the BOJ rate decision to Netflix’s earnings, the data was remarkable and even volatility inducing for specific segments of the financial system. But, it was not systematic. Some of the event risk we have over the next week is significantly greater speculative scope. Could US GDP, January PMI, Microsoft earnings or the Fed’s favorite inflation indicator light a bigger fire?

Part of the equation when it comes to assessing the market’s ability to commit to a more significant trend is the background. From a technical perspective, there are an abundance of outstanding technical barriers that could be deemed “significant” if they were to be broken. For the S&P 500, the limits were exposed and fully bullied. The well-worn 3,900 floor was tagged, but only after the bulls failed to take advantage of a close above the closely watched 200-day SMA (simple moving average). That particular moving average has played a key role in carrying a trend with critical tests and breaks in the past reinforcing its weight. However, its importance appears to have declined significantly of late – something to consider as the S&P 500 closes above the technical gauge ahead of Friday’s close.

Chart of S&P 500 Overlaid with the US 2-Year Treasury Yield / VIX Ratio (Weekly)


Chart Created on Tradingview Platform

Meanwhile, a bigger picture consideration is the argument made for the markets already fully discounting future fundamental problems with the technical “bear market” in 2022. Although an important correction, we only modestly corrected the growth of the previous decade and were not panicked. an unfolding in the market that awakens the opportunistic appeal. Why? With the overall risk/reward behind the market (above the 2-year Treasury yield as a ratio with the VIX) still climbing; fear was silenced. In the absence of a full market ‘flush’, systemic fundamental trends are more important to guide subsequent stages. I believe two more dominant themes dictate most of the market’s sentiment: monetary policy and growth forecasts. Over the next week, we’ll get into event risk, which touches on both themes, but I believe recession risks are the least encompassing threat with the greatest potential. We have a ‘developed world’ economic update this week and the IMF will give an interim update on its World Economic Outlook (WEO) on January 31, but an official 4Q GDP reading for the world’s largest economy is due on Thursday . In honor of this event risk, I asked business people if they believed the US would fall into a recession in 2023. After 200 votes, 72 percent believe it will.

Survey Asking Businesses About the Probability of a US Recession in 2023


Poll by Twitter.com, @JohnKicklighter

Looking at the economic box, there are a series of notable developments for which we should keep track. In the background, remember that the Chinese markets will be offline for the entire week in celebration of the New Year. However, given that the Chinese markets are disconnected from Western markets, it is unlikely to exert a significant influence on global speculative exposure. In terms of monetary policy, the Bank of Canada rate decision is the most high-profile event, but its scope of influence is narrow. The PCE deflator for sale is the Fed’s favorite inflation indicator, but it did not register a large response from the market – probably due to its Friday release time. There are plenty of growth-oriented updates from January PMI on Tuesday to US earnings with Microsoft’s update at the top of the pile, but top of the list has to be the US 4Q GDP release on Friday. According to the consensus economist forecast, the United States is expected to have grown 2.6 percent per year until the last quarter of 2022. There is likely a swing to the scenarios around this event risk. If the data is strong, it can be read as justification for the Fed to continue pushing the fight against inflation with higher interest rates. If it is weak, risk aversion can kick in (which would also benefit the safe haven of the Dollar).

Top Global Macro-Economic Event Risk for Next Week


Calendar Created by John Kicklighter

When it comes to the Dollar, there is an argument that it is under genuine pressure that guarantees a progressive depreciation – an economic outlook that is significantly weaker than counterparts; default risk with the debt ceiling brinkmanship or international diversification away from the Greenback between them. That said, I believe that much of the fall that the DXY Index has recorded these past few months is the result of a speculative pullback on the previous rally fueled by the combination of risk aversion and the Fed’s main interest rate burden. Unwinding an overextension is by its nature a limited commitment when the overextension is resolved. Given that the Dollar has retraced half of its nearly two-year climb in just a few months (we’re in the middle of 2021-2022), questions about how overextended the market is are reasonable.

DXY Dollar Index Chart with 100 and 200 Day SMAs (Daily)


Chart Created on Tradingview Platform

When you look at the potential of the Dollar, there are two speeds to evaluate. It’s EURUSD, which entered an exceptionally tight six-day trading range immediately after breaking high-profile resistance at 1.0750. That leaves speculative interests in the lurch. I check that pair for a break regardless of direction because the congestion is itself extreme. Alternatively, there are pairs that more clearly highlight the exaggerated tempo of the sale of the Dollar and are thus better positioned to assess its larger orientation. For that perspective, I check USDJPY, which posted its most aggressive three-month slide since the height of the Great Financial Crisis of 2008. With a very clear descending trend channel, the technical limits make for a distinct valuation.

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Chart of USDJPY with 20 and 500 day SMAs, 60 day Rate of Change (Daily)


Chart Created on Tradingview Platform

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