3 Things – New Highs, Dollar Rally, Margin Debt

These New Highs Look Like The Old Highs

There has been much commentary over the past week as the S&P 500 reached new highs. The issue, for me, is that these “new” highs look much like the old highs that we have seen since October of last year.

Each successive new high has been driven by a rather spectacular advance, historically unprecedented, subsequently followed by a sharp decline that leave investors a bit paralyzed.

As I discussed yesterday, momentum has been a key driver in the market as of late as the “fear” of missing further gains has overridden the logic of deteriorating fundamentals. As shown in the chart above, each decline has stopped at bullish trend line. The exception was the October decline which held longer term support but rallied back on the announcement of a massive QE push by Japan. Currently, the “bulls”remain in charge of the market for now.

The current advance to “new highs” in the market looks much like the “old highs.” The issue will be whether the ensuing correction, which may be underway now, will continue to hold the “bullish trend” while working off the overbought condition of the market on a short-term basis.

It is worth noting that at some point the trend will fail. It will be then that the mentality of the “herd” reverses and the chase of “returns” becomes a chase for “safety.”

Is The US Dollar Rally Complete

One the impacts to corporate earnings, due to the impact on exports which makes of roughly 40% of corporate profits, has been the recent surge in the U.S. Dollar. The dollar became the “safe haven” of choice as the Federal Reserve wound down the latest version of QE, and the deflationary pressures in Europe gained traction pushing the majority of those economies towards recession. Furthermore, the fear of a “Greek Exit” from the Eurozone made holding Euro’s less favorable in the event of financial disruption.