Morning Comment: Dollar & euro getting ripe for short-term reversals.

The stock market took it on the chin yesterday, but it came on the lowest volume of the year for the composite volume (just 3.2bn shares). The breadth on the S&P 500 was not intense either…at less than 3 to 1 negative. Where we did see some selling pressure was in the large-cap tech area…where the NDX 100 fell over 2%...on breadth of almost 20 to 1 negative. The volume in that market was somewhat low, but it was not anywhere near the lowest of the year…and only slightly lower than what we’ve seen in recent weeks……Still, with the overall volume at its lowest level of 2022, it was not a day of intense selling pressure. In other words, investors seem to be waiting to see tomorrow’s inflation data…and the beginning of earnings season on Thursday. Therefore, there is not a lot we should read into yesterday’s action…unless or until we get more downside follow-through soon.

We do want to highlight, however, that there is one area of the marketplace is starting to get quite extreme on a short-term basis. We’re talking about the currency markets. The dollar is getting quite overbought and over-loved…while the euro is becoming very oversold and quite hated. If you look at both the daily AND the weekly RSI charts on the DXY dollar index it is getting quite overbought. We’d also note that bullishness among futures traders has reached 92%!.....On the flip side, the euro has become very oversold on both its daily and weekly RSI charts…and bullishness for that currency has fallen below 10%. These are not the kind of technical readings that tend to be followed by further material moves in the direction of the recent trend.

Don’t get us wrong, this does not mean that the dollar is not headed higher in the second half of the year…or that the euro is not headed lower. It also does not mean that the dollar cannot move a bit higher over the very, very-short-term (and the euro lower over the very-short-term). However, it does tell us that we should see these currencies take a “breather” before too long. Of course, they could work-off their overbought/oversold conditions with “sideways corrections,” but experience tells us that it is more likely that we’ll see a dip in the dollar…and a pop in the euro…at some point quite soon.

In other words, those who are active in the currency markets need to be careful over the coming days and weeks. It also means that those who trade stocks/sectors that are sensitive to moves in the currency market need to be careful over the near-term as well. Therefore, even though we could very well see a break of parity between the two currencies this week, it might actually coincide with a surprising reversal in these currencies before long…that catches everybody off guard.

Again, we’re not saying that the rally in the dollar is over…or that any bounce in the euro will be something that lasts for many months. The fundamental backdrop is still conducive to these currencies continuing on the trends they’ve been seeing all year this year. HOWEVER, no financial asset moves in a straight line…and we DO think that the technical situation is starting to become something that will lead to a short-term reversal for these currencies soon……..We just believe the situation is extreme enough that it will involve a reversal which starts soon…and lasts more than just 2-3 days. Thus, we wanted to make sure investors were cognizant of this distinct possibility.

One final point….If/when we see a change in these currencies, many pundits will attribute it to some fundamental news. However, most of it will be simply due to the fact that the dollar had become SO overbought and over-loved that there was nobody left to buy it on a near-term basis…and the euro had become SO oversold and over-hated that there was nobody left to sell it (at least over the short-term).

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jul 12, 2022 — 9:07 AM
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