Everywhere you look, another hedgie is throwing in the towel — pronouncing the market overbought and susceptible to a big drop as a result of Fed normalizing.

I agree that rate normalization would be devastating for stocks.  But, folks, an additional 1/4% in Fed Funds is far from normal.  Call me when the 10-year gets back over 6%.  In the meantime, all the gnashing of teeth should just stop — at least as far as rates are concerned.

Investors should, on the other hand, be concerned about the veracity of information pouring out of Washington, the quality (and lack of) earnings growth, and the ability of central bankers to keep all the plates spinning a little longer.

The apparent equilibrium is tenuous at best, and largely relies on the inability or unwillingness of the few remaining active, fundamental investors to recognize the tricks and gimmicks being used to keep equities on the rise.

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With oil sliding and the USD on the ropes, equities are having a tough time maintaining the exuberance of Friday’s snap-back rally. ES has given up a 7.5 point rise and is trading slightly in the red.

This leaves SPX with an opportunity to extend last week’s slump, but only if currencies cooperate. As we’ve discussed the last few weeks, several pairs are on the cusp of a major move.

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To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time to every purpose, under heaven

The dollar’s dip has been a headwind for the markets, but it’s served a purpose: resetting various carry trades and putting things on firmer footing for the next stage.  I don’t know whether central bankers will be able to pull it off.  I don’t even know how they’ll attempt it (though I have some suspicions.)

I only know that EURUSD’s reversal at our 1.1470 target from Jun 13 [see: The Rally That VIX Built] is quite important.  And, if DXY should slip below its recent lows, equities are not going to take it well.

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It’s getting pretty tough for the few remaining live investors to believe the Fed’s rhetoric about the need for another rate hike — let alone the wisdom of the latest one.  Yesterday’s minutes did nothing to change that.

After a nice bounce (where it needed to bounce) the DXY is sliding back into negative territory this morning, taking the bloom off the yen carry trade and S&P futures both.SPX, which reached our IH&S target way back on June 1, still needs to backtest support after its latest suspect breakout.  Will today be the day?

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With FOMC minutes due to be released this afternoon, the dollar should continue to dominate the markets.

USDJPY’s recent breakout is looking more and more like the real thing.

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