QQQ Nasdaq 100 ETF, VIX, Dollar, USDJPY and EURUSD Talking Points

  • A 1.9% drop from the S&P 500 last week deviated from the historic opening week average, proving the best of the trading year
  • The Nasdaq 100 managed to maintain major support late last week as the USDJPY slipped its own near-term support as a measure of risk and monetary policy.
  • The main fundamental theme as a market driver over the coming week is monetary policy, with the Fed’s outlook finding daily milestones to stoke speculation

Risk trends for a difficult start to 2022

Historically, the opening week of a new year has produced a favorable – and often strong – wind for bullish interests. This does not appear to be the case for 2022. Looking back at history (1900 to present), the benchmark S&P 500 has averaged a gain of 1.0% over the period. opening, which in turn is the best performance of the 52 calendar weeks. year. This time around, the index closed down -1.9% despite a record high during the period. While this is a disappointing turning point for a metric that is often used as a barometer of the market as a whole, I won’t go into it too much just yet. With a radical change in monetary policy, a natural moderation of economic expansion, persistent risks from the coronavirus and the recognition of sufficient leverage throughout the financial system; there is plenty of fuel for any fire that breaks out. That said, it’s usually best to wait until the speculative bonfire is lit. On this front, QQQs (the Nasdaq 100 ETF) could be a good measure of escalation. the technology index that outperformed in 2021 will begin the trading week with a view to serious support. Friday slipped the 100-day moving average, but the combination of a multi-week range floor and the midpoint of the October-November range falls to around 378.50. After that, the trend channel floor through May 2020 stands at 375 and the “technical correction” from all-time highs is 367.84. Where will your conviction of a shift take effect?

Graphic by QQQ Nasdaq 100 ETF with 100-Day SMA, Volume and 100-Day Disparity Index (Daily)

Graphic created on TradingView platform

Ultimately, the Nasdaq 100 and S&P 500 are unique measures of a very broad and complex picture of sentiment. My preference is to refer to the correlation and intensity of multiple speculative assets to assess an underlying trend of rising or falling “risk”. Another universal measure is the business considerations that underpin the price component. Liquidity and volatility are arguably more influential in the conduct of the financial system than technical development or the deployment of a fundamental theme. As we enter normal market conditions from holiday trading, volume fills up but volatility remains relatively stable for now. Volume and volatility tend to have a positive correlation, while measures of risk taking (like the S&P 500) tend to have an inverse relationship. This creates a bias that the odds support the dominant bullish roll, but the much more intense move would follow a reversal.

Graph of historical average VIX by week overlaid on 2021 (weekly)

Probability of Nasdaq 100 and dollar breakdowns next week

Chart produced by John Kicklighter with data from S&P

The (known) sparks of market developments for the coming week

Looking ahead to individual fundamental triggers and larger themes; the first round of major central bank rate decisions, the surge in US profits and the start of 4Q GDP statistics – systemically important event risk – are still weeks away. That said, there is still enough left to generate concentrated volatility and possibly even tip the scales of sentiment across the market. The biggest threat of volatility on the radar are those events that will spark further speculation around the Fed’s expected tempo to tighten. On this front, we’ll see a significant update every day of the week. Monday brings the New York Fed’s Consumer Inflation Expectations Survey. On Tuesday, the three most hawkish members of the Fed (Mester, George and Bullard who are all voters) are expected to speak out on economic activity and monetary policy. Wednesday has, in my opinion, the best quote of the week – the market’s preferred inflation indicator, the CPI. Thursday produces the figure of the upstream PPI which can approach the constraints of the supply chain as well as the hearing of the Senate Banking Committee on the appointment of Lael Brainard, where she will undoubtedly be questioned on her accommodation. So Friday will offer US consumer confidence and spending. While there are other metrics to note – eurozone unemployment, Chinese investment, and US bank income – the greenback’s dance card is the only one that’s overtly full.

Economic Calendar of Major Global Event Risks

Probability of Nasdaq 100 and dollar breakdowns next week

Calendar created by John Kicklighter

From the risk of a scheduled event to more comprehensive themes, uncertainties regarding China’s management of Evergrande and its real estate sector as well as the spread of the omicron variant across the world may pose unexpected but primary threats to the market activity. That said, it will be difficult to distract control of the market’s attention from the underlying change from Monetary Policyv. The Fed’s sudden hawkish turnaround in December – and the market’s recognition of the shift last week after the minutes – shed a wide light on global politics. A possible four-rate hike in 2022 and an early March could make the US central bank the most hawkish of its major counterparts, but it is far from the only one willing to back away from the extreme accommodation. The more the outfits shrink, increase and / or reduce their balance sheet; deeper is the threat of risk trends which built a foundation on the belief that extremely easy politics was a reason to keep increasing risk exposure.

Graph of the perception of the relative position of monetary policy

Probability of Nasdaq 100 and dollar breakdowns next week

Graphic created by John Kicklighter

The dollar’s sensitivity to monetary policy is biased

In the last week alone, we have seen a sharp escalation in rate speculation in the United States. I find it ironic that the account from the FOMC, which essentially reiterated what the Fed and President Powell said on December 16e the policy / pressure decision seemed to trigger the biggest burden of the expected tightening. Nonetheless, we saw the likelihood of four rate hikes in 2022 soar to over 80% as the first hike moved from September through June through March. That said, there are points of reasonable skepticism that have arisen in the prices paid by ISM manufacturing; but I think the biggest market disparity to consider is the dollar’s inability to keep up with the rate hike in recent weeks. The ICE’s DXY trade-weighted dollar index cut the tracks for almost two months. If a hawkish movement does not raise the currency, could a conciliatory crosswind cause us to lose our minds?

Graph of the DXY dollar index overlaid on the 2-year US yield with 20-day correlation (daily)

Probability of Nasdaq 100 and dollar breakdowns next week

Graphic created on TradingView platform

My favorite expression of the US dollar remains the short side view of the USDJPY. Basically, this crossover has two huge drivers to consider: Fed interest rate expectations (since the BOJ is pegged) and risk trends. The greenback’s carry status is much more important, but the build-up of these yen crosses is highly dependent on the ebb and flow of interest around yield forecasts. Given that I consider both risk trends and US rate forecasts to be stretched, the scenario could find motivation through different developments. The pair has already fallen to the support of 115.65, but a deeper reversal could use the 61.8% Fib of the past 8 years at 115.45 as a subsequent index.

USDJPY chart with 50 period moving average (4 hours)

Probability of Nasdaq 100 and dollar breakdowns next week

Graphic created on TradingView platform

Meanwhile, EURUSD continues to grab my attention for its incredible consolidation. Over the past 38 trading days, it has traded in a range below 175 pips. This is quite extreme for this very liquid currency pair. While the disparity in monetary policies is a notable consideration for this crossover, the sheer liquidity of these two individual currencies exerts a serious influence on trend developments. Nevertheless, I believe that this cross is due to a rupture; and the longer the resolution takes, the larger the ultimate drive. I still prefer a bullish breakout of 1.1400 to a bearish clearance of 1.1200, but time will tell which direction the market chooses.

EURUSD chart overlaid with 50 and 100 day SMAs, 35 day ATR and historical range (daily)

Probability of Nasdaq 100 and dollar breakdowns next week

Graphic created on TradingView platform

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