Dollar Uptrend Since April is Done

As I showed in charts with the yen, the yield spread between government bonds was highly correlated with currency moves. As rate expectations decline, the yield spread will close and that should be a headwind for the dollar.

Two Main Market Scenarios

Energy shorts didn't work out yet. I thought there might be a pullback starting, but not yet. The upside target is still $150 here. I still think the better trade is on the short-side in energy, when and if QT kicks in. However, energy isn't the best short until QT starts working because it isn't a short at all yet. The boxes show the price range by month, a cheat-sheet for the CPI.

The reversal in bonds isn't dead yet, but like with oil, it's starting resume its general trend in 2022.

My highest conviction trade remains short stocks. I posted this chart yesterday as one possible path for the market:

Yet if oil and interest rates resume their upward march, stocks will start falling again at any moment. Maybe today is that moment, and yesterday was a day to sell at a price you won't see again for several years.

I had been looking for a low around $270 on QQQ and that was almost hit in May. The new target on the next wave down is $240 to $250, about a 20 percent drop from here. That would translate to around 3300 on the S&P 500 Index, but maybe more like 3400-3500 assuming tech underperforms again.

To sum up, the market should take one of two paths.

1. QT works and it kicks in fast. Crude oil leads a decline in stocks, bonds rally, and stocks could bottom in the summer, perhaps by early to mid July.

2. QT doesn't work. Investors panic and crude explodes higher, bonds collapse, and stocks resume their relentless slide with no capitulation. While there are more rallies, stocks don't bottom until perhaps September or October when $95 billion QT kicks in. Or surprise intermeeting rate hikes, or a 75-basis point or 100-basis point hike at a meeting, or accelerated/escalated QT causes a shock that triggers a capitulation event that registers in the VIX.

3. Intermediate scenarios involve stabilization, bonds hold or rally a little, crude doesn't climb past $120 and so on. However, the thing to keep in mind is that as crude rises, the more hawkish the Fed will have to become and soon. The wildcard that hasn't been played yet is the U.S. dollar. If that starts to crack (I don't think it will here), the Fed is going to enter panic mode because a falling dollar will turbocharge inflation. If the dollar falls, we are sitting at base inflation and a long way from peak readings on the CPI. All hell, political and financial, will break loose. My bet is the dollar goes higher from here, but if I was a Fed official, I'd be paranoid about doing anything that weakens the dollar before inflation is crushed.

Risk is high, the risk of policy error is high, and policy success or failure is negative for stocks over different time frames. Bonds, commodities and currencies could see wildly divergent scenarios based on Fed policy success or failure.

U.S. Dollar Index

Back to the Lotto

Who knows?

Now the Dollar Tests Support

Inflation trades will get a new boost if the greenback cracks.

Most Targets Broke Down

Still waiting on XLY, but ALGN, CTAS, MPWR, INTU, RH, MSCI, POOL, IDXX all broke down. Usually this is when the football gets pulled away. I added CMG and ISRG on possible breakdowns. NFLX also broke down. Aside from these, I see a lot of bearish setups. Mainly wading through them looking for the best setups. There are so many in the tech sector alone that no doubt many are out there.

The two next shoes might be SMH and BTC Bitcoin.

UUP tagged its 50-day MA today. I don't think the dollar matters much for the stock market right now, but down would be better for inflation trades and tech weakness, and up better for more general bearishness.

I'm going into Monday with guns blazing, but I'm here for the day the market doesn't bounce. There is growing bearish sentiment, but a lot of its is cautious from my reading. Looking for a 10 percent pullback tops. Fearful of the Federal Reserve, jawbone or policy shift. I don't sense much confidence or risk taking on the bearish side. History and support levels say maybe this dip was it. There's a case for a bounce and there have been face-ripper run ups from the support area the Nasdaq bulls defended today. But...if that support doesn't hold...there is nothing but air below. The risk-reward is heavily skewed in favor of bears thanks to VIX remaining suppressed. the 10-year yield held its breakout too. If the Fed opts for dovishness, they will probably ignite crude oil and the 10-year yields, and then the Nasdaq and all the ARKK trash will walk into an empty elevator shaft.

Wayfair Plunges Tomorrow

I think Tesla could get to $900 too, if Biden has hinted at a higher-than-expected CPI number.

Reuters: Biden says inflation data due Friday will not reflect recent drop in some prices

President Joe Biden sought to reassure Americans on Thursday that rises in consumer prices were easing somewhat, saying that inflation data for November due out on Friday would not reflect a recent drop in some prices including energy costs.

Maker forecast is 0.7 percent. I don't know if it is worse or not. That would raise the 12-month, but it'll take 0.9 percent to get a 7-handle.

Wayfair and Tesla are at support. The Russell 2000 futures crosses below the 1-year moving average again. IWM hasn't yet. If CPI comes in high tomorrow, I'm expecting a big down day for tech and related growth/momentum.

BTC looking ugly too.

This could be a bear trap. Maybe it's a dip and stocsk rip higher tomorrow or next week. I just want that caveat there to anyone taking on risk. I take on risks I can live with. I can reverse position at any time and do. But right now, I am betting the correction resumes tomorrow. XLY, TWLO, AAPL, UUP (calls) are my 4 largest positions. I have weekly options expiring tomorrow on ROKU, W, and XLE because I do think tomorrow could have some fireworks.

Charts of All My Current Option Positions

I'm going to start off with one that I want to re-enter, SMH. Popped today, but I see about 10 percent downside to the gap. I would not short this one now if I didn't expect a resumption of selling soon.

Here are three long positions (calls). A new low on GDX will get it kicked out. ditto for AEM if it loses support.

My largest position thanks to today's return. XLY is my largest notional position. A modest drop will make it the largest again.

The rest.