Weak Dollar, Rising Rates-Why Worry?

January 2, 2018

Mish's Daily

By Mish Schneider

Happy New Year!

Over the weekend I found a quote by T.S. Eliot:

“For last year’s words belong to last year’s language. And next year’s words await another voice.”

In market terms, last year’s rally belongs to last year’s language. And this year’s rally awaits a fresh voice.

However, I add one twist to that statement. Historical price moves matter.

That means focus less on last year versus this year and more on if and when the rally changes, hence the need for a fresh voice.

A trend has begun to emerge right around when the Federal Reserve raised the interest rates (as expected) in December.

The 20+ Year long Treasury Bonds have the potential to once and for all, reverse the bullish trend they have been on since 2009.

The U.S. Dollar, down more than 8% year to year, begin this year down even more.

Why should a weak dollar and rising rates concern investors?

It could lead to an inflationary environment that outpaces economic growth.

Inflation is a lagging indicator. Presently, inflation is at 2.2%.

Energy prices continue to rise at a fast pace. Copper has rallied 32% in the last year. It’s at the highest price since February 2014.

Gold and silver, basing over the last 4 weeks, continue to soar.

The US dollar, although not at the 2017 lows yet ((UUP, the ETF, low 23.66 now trading at 23.93), has failed the 200-week moving average and sits in a bearish phase.

At the end of this short week, we will learn of the latest unemployment number.

I see no reason for an increase in the number at this point, especially coming off the strong retail sales this past holiday season.

However, the easiest way to assess any turn in the recent economic heat, is to watch the unemployment numbers. Should they increase over the course of 2 months, cause for concern.

Modern Family helps too!

Back to the dollar; the relative strength indicator shows it oversold. The 20+ Year Long Treasury Bonds (TLT) is in an unconfirmed warning phase.

Should TLT confirm the warning phase, the risk is above 126.

The Dollar could rally a bit to work off oversold conditions. But unless it clears 24.50, rallies should be sold into.

The 2018 voice for the market, I am thoroughly convinced, is this emerging relationship among the dollar, rates, commodities (or inflation) and a potentially overheated economy.

Nevertheless, some words are evergreen, especially these:

Keep the macro picture in mind as the wind beneath the market’s wings. Yet, always trade with a sound, repeatable and teachable strategy.

S&P 500 (SPY) 267.50 pivotal support

Russell 2000 (IWM) Inside day. Under 152.49 caution.

Dow (DIA) Inside day and needs to hold 247.23 today’s lows

Nasdaq (QQQ) 158.77 recent highs

KRE (Regional Banks) 57.75 the 50-DMA support

SMH (Semiconductors) 100.71 the 50 DMA resistance to clear/close above

IYT (Transportation) Runaway gap working with today’s new all-time high

IBB (Biotechnology) Through 107.50 see 110 at least. (today’s high 109.46)

XRT (Retail) 46.00 pivotal number. Closed right there.

IYR (Real Estate) 80.00 now support