Dollar Wrecking Ball

A move is always more meaningful when very few talk about it.  There was a lot of noise about a strong dollar when stocks were getting pummelled in June, but very little talk about it now after a huge rally.  But the dollar just won't quit.  Honey badger dollar doesn't care about a dovish Fed minutes.  Its getting stronger.  EURUSD is knocking on parity's door again as the dollar carry trade is growing wings, reaching levels that it last saw in the early 2000s. 

Add the stronger dollar with a weaker bond market and you have a double whammy of higher yields and a stronger currency, hurting overseas revenues for US multinationals.  I don't really put much weight on currencies unless they are extreme moves.  The dollar is getting quite strong against the EUR, JPY, emerging market currencies, etc.  Its another obstacle for the US stock market, along with monetary tightening and a rapidly slowing economy.  

Really the only thing that the bulls have going for them is positioning, which is still showing a decent short base, although hedge funds seem to have reduced their shorts and gotten their net exposure up to near neutral levels, the index futures positioning needs to follow for this to be a slam dunk setup.  We will find out a lot today at 3:30 PM ET when the COT data comes out covering up to 8/16, which encompasses the moves from SPX 4120 to 4300.  If we don't see a substantial reduction in spec short positions, that will be shocking, and will ring alarm bells and make me more cautious on the short side.  

I never feel comfortable holding a short position when the crowd has the same opinion.  Almost everything I hear on CNBC, Bloomberg, Twitter, podcasts, etc. emphasize that this is a bear market rally and that the Fed is not going to pivot anytime soon.  That makes me a bit nervous when the crowd has the same thoughts as I do, although I do differ on their thoughts on the Fed.  

In my view, the Fed will make a dovish pivot sooner than investors think, mainly because the US economy will get much weaker than most forecast.  The economic weakness should be much worse than 2001, although not as bad as 2008.  Its not going to be shallow and brief like most are expecting, as bad inflation (food, energy, rent) will be high and good inflation (asset prices) will be be low.  Basically bad for the rich and poor, and really only good for commodity producers.  Right, you have a cyclical commodity downturn, but it is still a secular bull market.  The long term supply problems have not been solved, and China will not stay with zero Covid forever.  

Still short, but looking to cover some on weakness today and Monday.  Don't see anyone mentioning month end pension fund rebalance, which is usually don't over a few days ahead of the last day of the month, and front run by traders who sniff out the flow ahead of time.  So expect stock selling and bond buying from pensions next week.  Plus today is options expiration, which has become a weak part of the month, along with the Monday after opex.  It used to be the week after opex having most of the weakness, but that has been front run by the investment community who are more savvy to gamma hedging flows, and now the weakness often starts a few days before opex.