We think that the U.S. stock market is at interesting inflection point, both broadly and technically speaking. So far, Bernanke seems wishy-washy on the possibility of QE3. This is while economic data appears mixed at best. We continue to think that the start of QE3 will occur once economic data/stock market/money statistics weaken considerably. In addition, the S&P 500, as exemplified by the SPY, appears to be at a technical resistance level. This caps off the rally that began in early June, a rally that has occurred on declining volumes.
We have a small short exposure in our portfolios (representing gains remaining from a profitable trade off the March highs) and are considering adding to this exposure.
As for king dollar, the Powershares dollar bull index has sold off on elevated volume levels. This is after closing somewhat above the May 2012 highs. We also note that the UUP rejected higher prices in yesterday's trading. We are unsure if this represents the start of larger decline in the UUP, noting that with Europe still in doldrums that traders are likely to move into dollar-denominated assets for safety. The UUP was also overbought on the stochastics, and this decline may just be alleviating that condition.
So has king dollar lost its crown? At this point we do not think so, but we would watch the Euro for more information. The FXE (Currency Euu shares trust- an ETF that tracks the Euro) currently shows little investor interest. However, the ETF is oversold and the trends in both the MACD and RSI have diverged from the price trend. This may indicate an impending directional change in the price.
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