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Part I: The World Market Model
What did September bring to the markets?
Well, in case you have missed the news lately, there’s a lot going on in the world. When you look at the World Market Model below, however, the table looks pretty similar to the tables from a number of months this year—lots of red and brown and some yellow symbols. In the last few months, there’s been only one green ETF—UUP. But this month, we have a second. Interestingly, Biotech (XBI) is also green. We’ll revisit the USD topic later in the article but its strength has ubiquitous effects throughout the symbols in the database.
How would you characterize the table this month? You could describe the geographies, currencies, segments, and sectors pretty similarly:
- Lots of red.
- Some brown.
- A few yellow.
- Two green—the Dollar and Biotech.
Can the picture get worse? Possibly, yes. Will it get better? Eventually.
Notice by those questions and answers that red/brown (bearish) implies bad and bullish (green) implies good. Shorter-term traders and those who are open to trading many different markets would probably disagree, especially when you factor in volatility. They might say that markets are really “good” already – for trading. Trend followers might agree. At least those who are comfortable going short.
Let’s take a look at commodities, real estate, and bonds. All of which match the earlier description about the pervasiveness of weak Market SQN scores and colors.
Atop the highest scoring ETFs in the database is the USD ETF (UUP) at a moderately strong 1.44. That’s the highest score in the whole database, even though 1.44 is not that strong of a score. Biotech, genomic, and medical breakthrough symbols show up on the list but no other themes appear.
On the bottom list, a number of emerging country markets appear as do several interest rate-based products.
The bottom list is much, much weaker than the top list is strong. In fact, the database overall is even weaker than last month with 91% of the symbols in bearish ranges in September. There are no very bullish symbols at all, and only 1% of the symbols are bullish. 8% are in sideways. That may be the weakest month the database has ever seen, and it’s a sustained bearish database stretching on for months now.
Part II: The Big Picture
What are some of the primary factors affecting the global big picture right now?
- The USD is strong and continues its trend to strengthen against other currencies.
- Inflation in many countries is at record highs in recent decades.
- Economic growth around the globe is sputtering.
- The Fed will likely raise the Fed Fund rate again this month.
- Bonds, the very large (the largest?) asset class, are down significantly for the year (as rates have risen).
- The Fed is reducing its balance sheet by selling assets back to the market. This has the reverse effect of QE as the sales remove liquidity from the markets.
These factors along with the softening economic outlook and earnings fears led the market lower significantly in September.
Part III: The Current Stock Market Type Is Bear Volatile
With the Dow and S&P down more than 20% for 2022, we are officially in a bear market by the traditional definition. When you apply the Market SQN, you notice the methodology also sees various sized bears in the different time periods. The scores for this month are:
200 days – Strong Bear (Last two months, it was Bear)
100 days – Bear (Bear last month as well but it’s flirting with Strong Bear)
50 days – Bear (Bear last month)
25 days – Strong Bear (in rapid flux last month)
Were the hopes of the June/July rise dashed by September’s rapid downturn? The close on the 30th did break the June low.
The Market SQN score dipped into Strong Bear late in the month and closed just in Bear territory. It would not take much of a drop to push it into Strong Bear.
Volatility increased and climbed back into the Volatile range in September. If volatility increases, we are more likely to see continued index declines. But, if volatility flattens or declines, we are more likely to see the market moving sideways or up.
The major US equity indices all closed out September with >20% losses for the year, with NASDAQ experiencing the worst loss at nearly 33%. What are the chances the indices will make up that ground in the fourth quarter and finish positive for the year?
Part IV: Van’s Four-Star Inflation-Deflation Model
The model shifted the results from most of the months this year and produced a distinctly deflationary score.
September produced a nearly unanimous call among the inputs. All were deflationary except for the financials —XLF. According to the model, deflationary forces were stronger in September (the first time in many months). Does the model reflect the softening demand globally? In large part, one would say, yes.
Part V: Tracking the Dollar
After some late August/early September congestion around its recent high at 109, USD went above 114 and closed September 30th at 112.08.
From a technical perspective, if USD were to continue its trend, it could next revisit its 2001 high of 120. This is about 7% higher than its current level.
Conclusion
It’s too simplistic to say that one chart can explain the global markets. But, if you were pressed to pick just one chart, it would be the USD index chart shown above.
USD is more than just a component in the major currency pairs.
- It is the dominant reserve currency of most central banks.
- It is growing in value right now due in large part to the Fed increasing interest rates more than/faster than other central banks.
- In a world of increasing turmoil, it is still considered a safe haven.
- It is the currency on which international trade most frequently occurs.
- It is the currency in which many large country loans are made globally.
So, when the dollar has a strong, sustained trend, the effects eventually show up all over the world in different forms. That goes for both a strengthening Dollar, as we are seeing now, as well as for a weakening Dollar.
A few thoughts came to mind while reflecting on the Dollar.
- Analyst Charles Gave wrote a piece over the summer where he likened the Fed raising rates to fishing with dynamite. The Fed’s approach has been to drop dynamite (raise rates) until something big (like a whale) comes to the surface. In 1982, the whale was Mexico (followed by other Latin American governments) which said it was unable to repay its debts to US banks. In 1998, two whales came up almost together—Russia and Long Term Capital Management. In 2007, it was AIG. Gave speculated that the next whale could be the ECB. This past week, I was wondering if the Bank of England might be big enough to count as a whale. Perhaps not.
- A few months back in an interview, Stan Druckenmiller said that he was watching the dollar and that he could see USD being short somewhere around the end of the year. Druckenmiller is famous for some big currency trades so . . . How might you identify a top for USD and what kind of trade opportunity might appear?
- For the first time in years, “For Sale” signs in our little neighborhood in Raleigh, North Carolina have stood in various front yards for more than a few days – even while home prices have been continuing to go up. The combined increase in home prices and the increase in mortgage rates is making buying/owning a house a very expensive proposition now. Axios.com published a piece recently about how dramatic that shift has been. In Raleigh, NC someone needed an income of $39K to buy an average-priced home in 2020. Now, you need an income of $83K to afford an average home here. Quite the difference!
- Earlier this year, geopolitical analyst Peter Zeihan talked about broad global changes and explained that once the world order reached a relative balance, typically, that balance tended to remain fairly steady for decades. He called those glacial periods where not much seems to budge for a long time. When forces push the balance off-center, however, rapid and massive changes tend to happen in a just few years. He called these periods “lightning”. Zeihan emphasized that, geopolitically, we are in the lightning period right now.
The markets seem to be in a lightning period as well. After years of mostly bull market types, 2022 has brought significant down-moves and volatility. Is that scary or exciting for you? If it’s exciting, you are probably ready to trade, or already trading now. If that seems scary, focus on preparing yourself thoroughly for whatever comes next.