2023: A Year of Extremes
Every market is unique and must be analyzed in its own right. However, the 2023 market is incredibly unique. Whether it is the historic dichotomy between tech stocks and the Russell 2000 Index, the abnormally strong jobs market mixed with an extremely “hawkish” Federal Reserve, or the falling inflation numbers coupled with exploding energy prices, this year will be one to remember and study for years to come. Below are 3 of the most extreme factors impacting the market currently:
US Treasury bonds are considered to be a safe-haven asset. The iShares 20+ Year Treasury Bond ETF (TLT) is an ETF that tracks long-term US Treasury bonds. When the price of TLT falls, it generally implies that yields on long-term Treasury bonds are rising. Rising bond yields lead to higher borrowing costs for companies and consumers. In turn, these higher borrowing costs eat into corporate profits and thus tend to drag down US equities.
Interpretation: TLT is working on its 6th straight down month and is trading at levels not seen since 2007! A relief bounce in the coming weeks would make sense at this juncture.
Image Source: TradingView
Tuesday, equities were potentially working on a 90/90 washout day. A “90/90” down day refers to when the volume in declining stocks comprises 90% of the overall volume and when 90% of stocks decline for the session.
Interpretation: If the market can close with a 90/90 day, it would go a long way to proving that stubborn, underwater longs finally threw in the towel, and the market is ready to find a bottom.
A Strong US dollar can lead to weaker equity prices due to its impact on multinational companies, trade balances, and investor sentiment. When the US dollar strengthens, American goods and services become more expensive for foreign buyers, adversely impacting the earnings of US companies that rely heavily on exports. Multinational companies, which generate a significant portion of their revenue overseas, experience reduced profits when earnings from other currencies are translated back into stronger dollars. Finally, investor sentiment is negatively impacted as a strong dollar often indicates economic challenges and a “risk off” mindset on the horizon.
Image Source: TradingView
Interpretation: The Invesco USD Bullish Index ETF (UUP) is higher for the 12th straight week as it runs into old price resistance. Furthermore, UUP has an extremely overbought reading on the % Williams R technical indicator. An overbought % Williams R reading suggests that a stock or instrument needs to pullback. A pullback in the US dollar would be supportive of US equities.
Extremes often lead to market bottoms. Three such extremes are flashing signals now that may be bullish for US equity markets into year-end.
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