The 2020 V-shaped recovery has warped investors’ brains.
But this is nothing more than recency bias. In reality, bottoms are a process, not an event.
Don’t fall victim to what’s easy or comfortable. Instead, let’s focus on the facts.
Markets continue to send mixed signals, testing the resolve of even the most disciplined investor. Rather than fight the trend or trendless nature of the markets, I prefer to identify evidence that supports the next directional move.
And there’s one insightful chart atop my deck regarding the direction of the US dollar.
In late September, we highlighted the prior-cycle highs for the top commodity contracts.
The question was whether these levels would hold as support. So far, they have. But it’s two months later, and we’re asking the same question as those 2018 highs come into play again.
Let’s check back in on these critical levels of resistance turned support for clarity heading into year-end.
For crude oil futures, 76 is still our line in the sand:
It coincides with its 2018 highs, its July pivot highs from last year, and this year’s September pivot lows. Former resistance has turned into support.
Bonds are bouncing off key levels of potential support.
For some, it’s a former low. And for others, it’s a downside extension level. Regardless, we can all rejoice that bonds have stopped falling.
That doesn’t mean we’re rushing out to buy Treasuries. Instead, it signals a constructive start to a potential bottoming process for the bond market and relief from downside volatility.
Let’s check out the charts!
First up is the long-duration Zero Coupon ETF $ZROZ:
ZROZ has rebounded above its former 2014 lows, posting a potential failed breakdown. Risks are to the upside above 82 with potential resistance at the shelf of former lows around 100.
It’s a similar story for the Treasury Bond ETF $TLT:
I’ve even gone primal, cutting carbs while increasing fats for long periods of time.
But I haven’t tried the new all-meat-all-the-time lifestyle.
Whether you’re a full-on carnivore -- or even if you just enjoy a nice steak once in a while -- it’s time to hedge against rising beef costs using the futures markets.
Check out the chart of feeder cattle futures:
Feeder cattle represent weaned calves making their debut at the feed lots. They range from six to 10 months old and tend to weigh between 600 and 800 pounds.
While these young cows still have weight to put on, from the looks of the weekly chart, they’re planning to eat well this holiday season.
Don’t take your eyes off the US dollar and interest rates!
I know it’s been a long year, but we’re finally witnessing early signs of potential trend reversals. The breakdown in the dollar last week confirmed the mounting evidence suggesting the USD has reached its peak.
Now, will interest rates follow?
Check out the dual pane chart of the US dollar index $DXY and the 30-year yield $TYX:
They look almost identical. The recent breakdown in the dollar marks the lone flaw between the two, raising the question…
Will the strong relationship between rates and the dollar hold?
The dollar experienced significant volatility last week, posting its largest single-day loss since 2015.
As far as we’re concerned, the dollar is done. The weight of the evidence strongly suggests its best days are behind it. But that doesn’t mean it’s straight down from here for the US Dollar Index $DXY.
Instead, we expect plenty more volatility in the coming weeks and months. And when we look beneath the surface of the DXY, we’re at a logical level for the dollar to catch a breather.
