Futures are up moderately on USD weakness. The EURUSD has backtested its recently broken red TL and its SMA10, sending the DXY back below a TL it was threatening to break above. This supports our thesis that the SMA200 is the most important target, but that the tag might wait until it reaches 1.087 or so.
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Yesterday’s stronger than expected ADP data and the Fitch downgrade did a number on stocks, with several indicators officially turning bearish for the first time in months. But, AAPL and AMZN, which make up over 10% of the S&P 500, haven’t reported yet. So, it might be a little early for bears to get excited.
We charted AMZN last week [see: Amazon – Can It Keep Delivering?] noting that it had reached important resistance and was overdue for a reversal.
It tested important support at its 50-day moving average yesterday which, if broken, could easily usher in another 10%+ to the downside.
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Fitch downgraded US debt from AAA to AA+, adding to stocks’ overnight decline.
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With the July meltup finally behind us, futures are off moderately.
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It’s a big week for the market as many of the most important stocks are reporting amidst ongoing questions about the strength of the economy.
This morning, however, it’s all about the BoJ again. After effectively raising interest rates, they’ve jumped into the market to make sure interest rates don’t actually rise – boosting the USDJPY and, as a result, equity futures.
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AMZN stock cares about its 200-day moving average. In fact, it cares a lot. When it pushed above its 2903 Fibonacci target in late 2020, it spent 8 months waiting for the SMA200 (the thick red line below) to arrive and another 11 months defending it.
When it finally broke down in January 2022, it began a plunge that ultimately exceeded 50%. Since January 2023, it has recovered nicely, clawing back above the SMA200 to the midline of the channel that dates back to the year 2000.
But, this leaves it at its 200-week moving average and overbought amidst negative divergence while long overdue for a backtest of its 200-day moving average. A backtest from current prices would amount to about 20% – though the SMA200 is on the rise.
It should be noted that AMZN has been more volatile than the overall market. But, it’s not hard to imagine a sharp decline in the third largest component of the S&P500 leaving a mark on stocks in general.
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Consider all the lies that central banks tell in order to prop up economies/banks/stocks. The Bank of Japan is, by far, the most prolific. For years, they’ve held interest rates below zero – supposedly in order to boost inflation inflation to 2%. They’ve persisted in this strategy even as inflation spiked well above 2%.
At the same time, they have engaged in massive currency manipulation – deflating the yen in order to stoke the yen carry trade that fuels the Japanese stock market (along with direct equity purchases by the BoJ and the Japanese National Pension System.)
The net result is a mismatch between inflation and interest rates that any freshman economics student could see is bonkers.
And, it’s happening while Japan’s national debt continues to soar.
Japan’s periodic spikes in inflation have been driven primarily by energy prices. Because oil is priced in US dollars, a plunge in the value of the yen causes the price of oil in yen to soar.
When it peaks, one of two things is required in order to prevent catastrophe: a rise in the value of the yen (i.e. a drop in USDJPY) or a drop in the price of oil. Both are normally quite detrimental to stock prices.
Recall that WTI reached our 130.50 target almost a year ahead of schedule thanks to Russia’s invasion of Ukraine. It has been ratcheting lower ever since – until this past Monday when it broke out of a falling channel and spiked above its 200-day moving average. The BoJ is understandably nervous.
When this nervousness resulted in the BoJ leaking a little bit of truthiness about their predicament yesterday, it essentially raised the upper bound in interest rates from -0.01% to +1.0%. This drove the value of the yen much higher (driving the USDJPY lower) which poses a big threat to stocks.
It led to a sharp selloff in stocks at the close. If VIX hadn’t been hammered by almost 11% overnight, it would have continued into today’s session.
Will investors grasp the importance of a spike in the cost of the cheapest financing on the planet?
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He could have gone full hawk, but he didn’t. Even in the face of economic data (that the rest of us can now see) which was uniformly positive and a coming bump in inflation, Powell chose the route that best supported stocks. ES bounced at its SMA10 and is surging toward its .886 Fib retracement.
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Equities have ramped almost 12% since the last Fed meeting – ignoring the prospect of higher interest rates for a longer period of time. Given the oil market’s recent breakout and the obvious base effect on inflation, we see a good chance of Powell presenting a more hawkish stance than the overbought market is prepared for…
…raising the prospect of spike in the 10Y to 4.76% by mid-August. One of the few developments that could prevent it: a collapse in oil/gas prices.
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The recent breakout in oil/gas prices has now inspired a breakout in the 10Y.
It’s an important headwind for the Fed, which had relied on falling energy prices to keep inflation and interest rates at an acceptable level.
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