After a Week Off, Seeing Small Changes in the Market
What's changed since I left for vacation? The Dollar and small caps.
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One of the things I love about time off is—well, okay, time off is something to love all on its own—that I get to come back to the market with fresh eyes. I get to see what’s changed over the course of a week. I get to see if the indicators have shifted in my absence.
So, what has changed? Most notably the US Dollar. The DSI got so low that the Dollar Index bounced right off support. Yes there is resistance overhead but step back and look at that steady decline over the course of the last two months. There is one month to go in the third quarter and this is the first real lift the buck has had in the quarter.
Another change is that despite Chair Powell’s speech the yield on the Ten Year is now higher than it was before my vacation. The chart shape (although the timing is different) is quite similar to the buck. Of course that makes sense but the bonds and the buck should matter to stocks so we should take notice. It has been my view that rates should back up to that 4.1% area and for now it seems that is on track.
Oh maybe not this week—the Employment number is out on Friday—but over time that is my view.
Then there are the small caps relative to the QQQs or S&P. In this case I am not talking about the IWM but the QQQJ. The first thing that struck me about the QQQJ, the juniors, not the mega caps, is that they have rallied all the way back to their summer highs. That is in keeping with the S&P (but not the Nasdaq) but it is not in keeping with the IWM. These smaller tech stocks have gone sideways all year so that’s a change.
We already know the mega cap names—the index movers—are not outpacing everything else. Look at the ratio of the QQQJ to the QQQ. When the chart goes down the big ones are outperforming the little ones. And vice versa. You can see the ratio went down off the early August low (bigs were doing better than smalls). But in the last week or so the juniors took over the lead.
Why does all of this matter? Because, having come down nearly 15 points in the final two weeks of August, which may not sound like a lot, but it is three percent, the QQQs have a big test ahead of them this coming week.
Can they rally and cross that line around 485 or will they fail? If they cross the line we already know they tend to do so at the expense of the other 493. If the QQQs can’t cross that line that then I think the view that their dominance is sidelined for now will become the chatter of the month.
Also their dominance subsided when the buck got weak (early July) so if the buck has a rally, can the QQQs do better?
