Dollar Peaking would Help

Last week, U.S. stocks rose ranging from 2.7% for the Dow Industrials to 4.1% for the NASDAQ. The S&P 500 split the two and gained +3.6%. So far this Monday morning, Treasury yields are lower along the curve, ranging from -2.8 basis points for 5-years to -1.3 basis points for 30-years. Last week, yields rose from 17 bps at the front end (2-years to 3.56%) to 10 basis points at the back end. Ten-year Treasury yields rose 12 bps to 3.31%. The 2-year to 10-year yield curve inverted to -25 bps. The market is bracing for another 75-basis point Fed hike.

The key to the move up in stocks last week was the short-term peaking of the U.S. dollar last Tuesday as foreign Central Banks picked up the pace of their own interest rate increases. The European Central Bank (ECB) raised its benchmark interest rate by a 0.75%, the largest on record for them, following in the footsteps of the Fed.

Sentiment: In the latest update, only 18.1% of responses to the weekly AAII sentiment survey were reported as bullish. This is the third consecutive decline in bulls resulting in the weakest reading since the end of April. Bearish sentiment has move substantially higher, climbing back to 53.3% last week. That is the highest level of bearish sentiment since the week of June 23rd and ranks in the top 2.5% of all weeks on record. This is contrarian bullish given the market is beginning to see positive breadth thrusts upward.

Economic data this week includes the CPI report on Tuesday, retail sales, and Philadelphia Fed Manufacturing Index reports on Thursday. There are no scheduled speaking engagements from the Fed this week, reflecting their own blackout period. China, Hong Kong, and Korea stock markets are all closed today for their individual mid-autumn festival holiday.

Interesting data – last Friday, the Nasdaq 100 (QQQ) went from below 5% of advancing volume (9/20) to above 95% (98.9% on Friday), while below the 200-day moving average for only the 9th time since 1996. Here are the prior drawdowns, as well as the 1-year forward returns from the prior 8 signals.

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