We’re back from a refreshing summer break, and hopefully you managed to squeeze in some sunshine, long days, and a bit of time away from the screens too.
Just two weeks ago, in our last note before the break, we highlighted the growing number of warning signs that had been stacking up. At the same time, though, we stressed an important point: if this market had already spent several weeks de-risking, then there was also plenty of room for sentiment to improve again.
What kept us leaning toward the glass being half full rather than half empty, despite all those warning signs, was the Dollar Index already rolling over, coupled with the extreme dollar positioning among asset managers and institutional investors. To us, that was the clearest sign that it wasn’t time to fight the tape just yet.
Fast-forward two weeks, and the market has made that decision look pretty sensible. The S&P 500 is up 4%, while most of our tactical trades have done even better. Our Gold and Software trades have been particular standouts, gaining more than 8% and 10%, respectively, over the past two weeks.
More importantly, those gains haven’t just padded the performance numbers. They’ve gone a long way toward repairing some of the broken charts we were pointing out before our summer break — most notably, the breakdown in the S&P 500 vs low-volatility stocks, which had been a pretty clear warning sign that risk appetite was deteriorating.
Now, the chart that matters most to us today is still the same one we were watching 2-3 weeks ago: the Dollar Index alongside US Dollar Futures positioning.
And that’s because positioning remains heavily skewed toward the dollar, leaving plenty of room for a potentially powerful unwind. If that starts happening any time soon, the past two weeks may turn out to be less of a quick repair job and more of the beginning of a much bigger renovation.
And that’s where things could get really interesting.
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