INFLATIONARY IMPLICATIONS OF FALLING DOLLAR AND SOARING COMMODITIES WEAKEN STOCK MARKET -- NASDAQ FALLS THE HARDEST
TOO MUCH FOCUS ON THE FED ... It seems to me there's way too much focus on what the Fed does or what it intends to do. Yesterday's Fed statement hinted at another rate hike in the offing. I suspect there will be several more after that. That's because the Fed isn't in control of global market forces. What I got out of yesterday's statement was that the Fed is going to be data driven. In other words, it's going to react to future data. I hope that's going to include market data as well as economic data. Because market data is painting an increasingly inflationary picture. Today's market activity is a good example of that. The combination of a falling dollar, soaring commodity prices, and rising bond yields all suggest that inflation expectations are heating up. That's in direct contrast to the Fed's claim that inflationary expectations remain well contained. A lot of the market's recent rise was based on the hope that the Fed would pause after this last rate hike. Yesterday's comment seemed to rule that out. Today's fall in the dollar and surge in commodities makes a pause even less likely.
Chart 1
NASDAQ 100 SHARES THREATEN 200-DAY AVERAGE ... The Nasdaq 100 is falling more than 2% today and is the day's weakest stock index. That reflects heavy selling in big technology stocks. Chart 2 shows the extent of the short-term damage. The Nasdaq 100 Shares (QQQQ) are within striking distance of the 200-day moving average at 40.60. The QQQQ has been trading over that long-term support line since last October. Selling in the technology sector has been pretty broad-based including networking, the Internet, and semiconductors. Chart 3 shows the Interactive Internet Index (IIX) tumbling beneath its 50-day line. Chart 4 shows the Semiconductor (SOX) Index falling toward its 200-day line and its March low near 490. Any serious violation of the 200-day average by any of the technology indexes would be a bad sign for that sector and the rest of the stock market.
Chart 2
Chart 3
Chart 4
NASDAQ RELATIVE STRENGTH IS BREAKING DOWN ... One of the key intermarket indicators that I track closely is a relative strength ratio of the Nasdaq Composite Index divided by the S&P 500. That because the direction of that ratio often dictates the direction of the entire market. Chart 5 shows the ratio falling to the lowest level in more than six months today. Meanwhile the Nasdaq Composite Index has violated its 50-day average in decisive fashion (a short-term sell signal) and appears headed toward its 200-day line and the price lows formed during the first quarter of the year. That will be a very important test for the Nasdaq market and the rest of the market as well. Chart 6 shows why.
Chart 5
Chart 6
TURNS IN THE NASDAQ/S&P RATIO ... The daily bars in Chart 6 plot the S&P 500 over the last two years. The solid blue line is the Nasdaq/S&P ratio. Notice that the last three upturns in the ratio line (August 2004, May 2005, and October 2005) coincided with bottoms in the S&P 500 (blue circles). The last two peaks in the ratio (December 2004 and August 2005) coincided with peaks in the S&P 500. Today's fall in the ratio to a new six-month low puts the S&P uptrend in some danger. When a market correction occurs, it usually starts in the technology sector and is reflected by relative weakness in the Nasdaq. That may be happening right now.
