It's looking more and more like a longer-term top is in for the U.S. Dollar Index, writes Jeff Greenblatt.

I’ve been watching the U.S. dollar very closely over the past month. In our work, the square out for the retracement and its inverse ratio is very important. Here we have a move down of 15.665 points and push back of 11.18 for an inverse of 1.30. From the high in January 2017 the greenback stalled out in roughly 139 weeks. It did nothing for several weeks but finally rolled over in week 143/144. Notice the square of 9 reading at the bottom 144dg (see chart below). Its been lower ever since as it has finally broken through various indications that would’ve held in a more bullish market.

dollar index

It could have serious implications considering the Fed Repo action. As we know, the Federal Reserve stated that they will continue their operations through the first week of November. While I’m certainly not an expert on government finance, I did pay a visit this week to usdebtclock.org. Lots of numbers to digest but what jumped off the page aside from the national debt, which is nearly $23 trillion, is the Federal debt to GDP ratio. In 1960 it was 52%. By 2000 it was roughly 56%. It dropped significantly by 1980 but just looking at these numbers we can see it rose four points from 1960-2000. Right now, that number is a whopping 105.99%!

None of us really know what is going on behind the scenes but that can’t be a good number and some people are starting to wonder if the system is getting flooded with easy dollars to help pay down some of this debt. Lots of people have also been looking for a selling event in this September-October season which hasn’t happened. Has the Fed cranked up the printing press to cut a disaster off at the pass? 

In his landmark book, The Dollar Crisis, Richard Duncan states governments can postpone the day of reckoning years into the future. Bottom line, the market wasn’t ready to go because when it is no power on Earth can stop it. But they might be only kicking the can down the road. There has been a rotation out of bonds into the stock market over the past week. It’s early right now and the bond market is not even close to where it was a year ago. But if the stock market keeps on going, the potential is there for the bond market to plummet, which will certainly spike longer term rates. When that happens, we’ll be in the same position as the fourth quarter of 2018 but the stock market will no longer be in the most favorable part of the four-year cycle. We’ve discussed bearish seasonal tendencies for the SPX this time of year. Extreme caution through the end of October is called for. So, we aren’t out of the woods yet but we are close. But if the value of the U.S. dollar keeps dropping, I suspect the crowd will get a mood change.

In other news, the Kairos reading kicked in perfectly last Friday as news of the structure of a trade deal was put in place. As you see on the Nasdaq 100 chart (below) there was a 52% retracement along the way so the principle of replication kicked in as the market gapped up out of the 53-day window on the optimism of the trade deal. This is yet another manifestation of when the cycle matures, the news event almost magically materializes. Right now, the NDX is encountering some serious resistance in terms of the recent highs, but also when we connect the dots back to the 2018 top. What happens here will determine if the sell in May and go away season is truly going to be over. At this point it appears the only thing that could stop this market is either a geopolitical event or some sort of natural disaster.

nasdaq

The morale to the story?

We come to the markets with our own ideas and opinions. Many people were looking for September and October to be the graveyard for stocks, and historically have been. The market doesn’t know or care what we think. Since Labor Day I’ve written about the bullish and then bearish setups after Sept. 20. A good indicator you can rely upon to give you a good signal is the only thing that counts. Coming into last Friday, the Kairos readings were mostly deadlocked and if I gave a slight edge to the bears it was only because of the seasonal factors. Obviously, there were major factors at play this year such as what the Fed has done. As long as you can adapt, you’ll be fine.

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