The Three Most Important Charts in the Market Right Now!
I often think of the market as a mosaic of information and data points. I wish there was one thing that served as the magic bullet. That if you solved for it, you would have the answer to all the market’s secrets. If only it was that easy.
Right now, I think that there are three charts that matter and will determine if the current choppy trading is simply a consolidation or a top. The first is the 10-year yield. The massive spike in yields has been the main issue that has caused the uptrend since March to take a rest, especially in the much-loved story stocks. I have written about this a few times recently and I bring it up again because I think it is that important. The yield is now trading into a big zone of resistance. Right now, bullish investors just want to see the pace of the advance slow. If the climb simply slows down, I think that the equity market will stabilize and begin to move higher, as it has played out in the past. Yesterday, the treasury sold $38 billion worth of 10-year notes in an uneventful auction. That’s good since it was a sloppy 7-year auction a couple of weeks ago that caused the latest spike higher in rates.
Should the pace of the rise in yields begin to slow, I would expect the Invesco QQQ Trust (QQQ), which tracks the top names in the Nasdaq index, home to many of the high growth stocks that have come under pressure, to continue to hold the $300 level which has acted as support thus far. Based on the work that I have been doing, that is my base case. However, I also admit that the uptrend in the market is wavering and the odds that this important level breaks to the downside are increasing relative to what they were a few weeks ago.
With my base case being that yields are going to slow their ascent and the QQQ is going to hold support, the third chart is the wildcard that is off the radar for most investors other than the macro traders. That’s the dollar. Since last March, the dollar has been moving lower. As that has been playing out, risky assets (like most stocks) have been moving higher. As we entered 2021, everyone was bearish on the dollar. It was consensus to hate the dollar. And why not, the government just prints more of them whenever we need them. By the way, another $1.9 trillion in stimulus is on the way as the House passed the latest package.
But, as is often the case, the market gods looked down on the earth on January 1st and said, “everyone hates the dollar, let’s make it stop going down!” And so it is that the most hated asset in the market is making the greatest number of people feel foolish as it stopped going down right at the start of the new year.
As the dollar has moved higher of late, risk assets have turned choppy with the most pain being seen in the riskiest areas of the market. The US Dollar Index is now trading into a key zone of resistance near 92. If it fails here, risk assets like QQQ should find and hold support. However, if the dollar moves higher and a new uptrend takes hold, I think risk assets will be in for a rough patch.
These are what I see as the most important charts in the market right now and the “if / then scenarios” that go along with them.
There is not going to be a note tomorrow.
*Nothing in these pages should be considered investment advice.
Thanks Dan.