Dollar Index Might Be Near Its Peak

Dollar Index - Stocks Finally Rally Wednesday

The S&P 500 opened up big, but gave back some of its gains in the afternoon. It closed up 0.54%. From the peak of the day to the close, it fell 1.26%.

This market wants to rally. But there is so much uncertainty about the trade war with China and Fed policy that it is stuck in a tight range near the February low.

The CNN fear and greed index worked as buy signal as it was in the single digits heading into Wednesday. It went from 8 to 10 on Wednesday. I have no edge trading stocks until we get clarity on the issues the market is concerned with.

The economy is in the middle of a slowdown, which isn’t as bad as 2016. Also, stocks are relatively cheap and oversold.

Dollar Index - Twitter Outperforms Again

Twitter stock was one of the best performers for the 2^nd straight day. It is up 10.15% in the past month which is amazing outperformance as the S&P 500 is down 1.87%. I have been bullish on Twitter partially because it doesn’t violate users’ privacy the way Facebook does.

The KBW regional bank ETF rallied 1.24% which allowed the Russell 2000 to rally 1.05%. As you can see from the chart below, both the KBW bank ETF and the KBW regional bank ETF have been crashing.

Banks are on pace to have the worst quarter since 2011.

The Nasdaq was up 0.95%. The VIX fell only 1.38% to 21.46. It is still very elevated which makes sense because of the uncertainty.

December is usually a good month for stocks as fund managers are closing their books, getting ready for a new year. The potential for a Santa Clause rally is usually discussed. This year is much different as uncertainty reigns supreme.

Dollar Index - Consumer Discretionary Leads The Market Higher

Financial media firms claimed stocks rallied on trade talks, but that’s what they have been saying when stocks have gone up in the past few months. I won’t believe the rumors until a concrete plan is agreed upon. I think one will be made within the next few months.

Consumer discretionary stocks underperforming the market signals a recession is coming. They rallied 1.05% on Wednesday which suggests traders aren’t worried about a recession even though a recession has been discussed ever since the 5 year/3 year curve inverted.

The 3 down sectors were consumer staples, utilities, and real estate. They fell 0.16%, 0.58%, and 1.89%. The first two declined because of the ‘risk on’ trade, while real estate fell because interest rates rose.

Dollar Index - The Dollar & Oil

The dollar index’s uptrend has been in place since April, but it might reverse soon. When the American yield curve is flat relative to its dollar index peers, it means the dollar index is near its top.

This makes sense because the Fed is near the end of its rate hike cycle. It is no longer going to be extremely hawkish relative to other countries’ central banks.

Personally, I think this rate hike in December has a good chance of being the last one this cycle. The ECB is planning to hike rates next year now that it has ended its QE program. I’m not sure if the ECB will be able to hike rates since Italy could be in a recession.

However, I am sure the Fed won’t be as relatively hawkish in 2019 as it was in 2018.

Dollar Index - The $97 handle on the dollar index could be its peak for the cycle.

The table below shows expectations for the December 13^th ECB meeting. As you can see, QE is over, and the ECB will keep rates where they are until the summer of 2019.

Keep in mind, not only is Italy facing a recession, but also German Q4 GDP expectations are collapsing. Consensus estimate for Q4 GDP growth was 2.3% in April. Now it is only 1.1%. GDP growth was -0.2% in Q3 which means another negative report will push it into a recession.

If the dollar index falls, it will be great for commodities. I also think oil is near its bottom because there is no longer a supply glut.

As you can see from the chart below, oil has gone from an inventory glut to a small deficit. With a trade deal and an oil deficit in place, I could see oil increasing in the beginning of 2019.

Once the U.S. recession starts, that will reverse as demand will come down. However, I don’t see a recession occurring until 2020.

Dollar Index - Fed Still Expected To Hike

The curve has steepened slightly over 2 basis points recently as the 10 year yield is 2.9% and the 2 year yield is 2.77%. That 13 basis point difference can quickly evaporate or expand, depending on the Fed’s guidance next week.

Currently, there is a 78.4% chance of the Fed hiking rates. It would be interesting if the stock market fell below the February low before the meeting. But I don’t think that will happen.

Dollar Index - Bank Of America Releases Its Top Picks For 2019

The table below shows Bank of America’s top stock picks for 2019. Their picks did decently in 2018. As of December 10^th, the average returns since the picks were published was 3.2% which beat the S&P 500’s return which was 1.6%. I don’t have the research team of Bank of America, so I can’t give that many picks.

My top idea is to short Yeti. Yeti is a consumer products firm that specializes in drink-ware and coolers. These are commodity products which Yeti sells at a premium price. I don’t think that’s a solid long term business plan.

Dollar Index - Conclusion

The December market isn’t quiet like it usually is because of uncertainty on trade and Fed policy.

There is also a government shutdown, an economic slowdown, Brexit, and an Italian recession. The laundry list of worries is all adding up to a volatile stock market.

Bulls hate uncertainty. The uncertainty won’t let up by the end of the year. There might be a mini Santa Clause rally, but the wild swings will stay.