Weekend Market Review - October 14, 2022
Will magazine covers kill the dollar rally?
Will magazine covers kill the dollar rally?
A funny thing often happens when major publications make bold financial or market statements on the covers of their magazines. They tend to be dead wrong.
I first learned of 'The Magazine Cover Indicator' from the research of Dorsey Wright and Associates. It's one of those funny Wall St. anecdotes that maybe doesn't have enough empirical data to really be a signal. But at the same time is interesting enough that it’s hard to dismiss.
Many have studied and written about it. I'll leave the deep dive for them. But the gist of this theory is that magazine covers can represent the collective mood of market participants. And since the process responsible for getting these stories and images onto the magazine covers is rather lengthy, the message is often wrong, or at least late.
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Could we see this develop again with the US Dollar?
We know the Dollar is very strong. For months now I have included a $DXY (US Dollar Index) chart with each report.
It hasn't stopped yet.
We've seen how the market can move with just a little help from a falling Dollar.
But now there is another factor. The magazine covers.
Recently a few prominent publications have pointed out the US Dollar strength on their covers. Will it kill the dollar rally?
There's no way, right? Magazines can't predict the markets.
It’s true. Nothing can.
But maybe it is indicative of where we are in the cycle. Trends don't last forever. And when they turn parabolic, as the dollar trend has, they tend to have dramatic ends.
So, am I betting on the end of the dollar run? Not based on magazine covers. But I will keep watching very closely. I still believe that a falling dollar will be a necessary ingredient for rising stock prices.
In the Midweek Market Update this past Wednesday I addressed the forthcoming CPI announcement. I started to write more about how the report might affect stock prices. I’m glad I saved the effort as that explanation was completely useless yesterday.
It should’ve been pretty simple right? Higher inflation means more Fed rate hikes which slow the economy and hurt the stock market. Lower-than-expected inflation would mean just the opposite. Right?
Yesterday morning it looked like the capitulation was starting. Coming into the report, futures were down sharply pre-market. Then the numbers hit at 8:30. “Hotter than expected.”
"Here we go," everyone thought as stocks started to sell off dramatically. But then it stopped. And not only did the selloff stop, the indexes stage one of the biggest one-day turnarounds ever — a great move, but not the kind of thing that happens in a healthy market.
Now what? How ‘bout all those enormous, bullish engulfing, green candles? Such a huge turnaround would surely lead to follow-through and higher prices. Right?
Maybe. Maybe not. Today’s selloff is a bit deeper than the bulls want it to be.
This seems like a good time for a reminder that "Only price pays." See the @alphatrends tweet below.
Stories are just stories. Magazine covers are just the one-page visual embodiment of those stories. And economic, business, or geo-political data is just that. Data.
As traders and investors, only one thing pays us.
Can we buy at one price and sell at a higher price? That's it. That’s the only thing that matters. That's why I spend so much time focusing on the price charts. They cut out the noise and focus on the most important factor.
Let's have a look.
$IWM - If this $IWM bear flag was a United States Flag it would need to be designated "Unserviceable" and disposed of by ceremonious burning. The pattern is incredibly tattered and worn. But, it is still a pattern.
$UUP weekly chart - This is the dollar index ETF and should be more easily accessible than $DXY if you’d like to chart it yourself.
Bull and bear case
The bull case for $SPY is first, a move over $370.
This has been an important area for several weeks now keeping a lid on things for all but three of the last 15 trading sessions. If that happens, the next requirement is a move above the 8 and 21-day EMAs, and those EMAs need to be sloping upward, with the 8-day above the 21-day, similar to the action from July 22 to August 22.
That would be a traceable sequence, but still wouldn't necessarily mean that the bottom is in.
The bear case is more of the same: bad inflation data, a slowing economy, a rising dollar, and a rising $VIX index.
Stock prices are heading back toward yesterday's lows. Trends tend to continue. The levels there are easy to spot. As noted above, I'll be watching the Dollar very closely for some relief. $VIX could be very important as well. So far it has been contained under the mid-30s. A move through 35 would be a troublesome sign and would very likely be accompanied by a sharp selloff in stocks.
What do you think?
What I'm reading and listening to
I did buy a new book this week but haven't made time for reading yet.
"The Blueprint to Trading Psychology" by Alan Edward aka @TheDivergentTrader
Alan is a great follow on Twitter. I'm really looking forward to reading the book.
From last Friday.
This Friday doesn’t look much different.
Who’s going to win?
I’m sure the bottom callers are exhausted.
You said it, Bart Simpson.
A little spooky statistics nerd humor.
That's all for now. Thanks always for reading, subscribing, and sharing with your friends and family.
I hope you have a fantastic weekend.
***This is NOT financial advice. NOT a recommendation to buy, sell, or trade any security. The content presented here is intended for educational purposes only.
Andrew Moss is an associated member of T3 Trading Group, LLC (“T3TG”) a SEC registered broker/dealer and member of FINRA/SIPC. All trades placed by Mr. Moss are done through T3TG.
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Long: SPY 1021P350
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