It’s A Dollar-Driven Market

The month-long rally in the Euro/Usd took a breather yesterday.  It will be interesting to watch it today to see if there’s follow-through.  Overnight, India is talking about pulling back on stimulus as other nations consider similar measures to stem the tide of future inflation.  The US has talked a good game with regard to allowing the economy to stand more on its own; however actions speak louder than words - usually.

The Treasury is suggesting that they will cut back on UST purchases at the end of this month.  That could have an impact on interest rates - rising rates could further slow the recovery.  Yesterday,  we saw the rise in the dollar as the bond market sold off under the weight of the huge UST refi’s.  We can expect more of the same.

The ES (SP500 futures) seems to have anticipated the move higher in the US dollar, as it broke down and seems to have entered into a down channel, which it broke out of yesterday (on the downside).  The bottom of the channel is the 1069 level, with further resistance at the 1077 level.  The top of the channel would then offer the next level of resistance at the 1091 level.

If the ES fails to get back into the bottom of the channel, then I think we could see a big decline on the day today.  It’s becoming apparent that this entire rally since March has been completely artificial.  It has been built on the incredible stimulus - pumped into the system by the rest of the World.  It cannot continue indefinitely.

There is a day when the stimulus measures will have to be withdrawn, and the economy will be expected to stand on its’ own.  The economy is still weak, and unfortunately, the withdrawal of the stimulus will result in further weakness in the stock market.  Investor sentiment/mentality will be to protect profits and get out of the market at the first signs of weakness. Investors burned at the end of last year do not want to re-live that saga. This will add additional fuel to the selling when it does begin (IMO).

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