DOW(N)? | A Dollar Milkshake Scenario
Diupdate
I feel bad when I am filling up your feed with my non-stop posting.
There are too many charts that I want to talk about. I could post them as "updates" to my earlier ideas. But this would be confusing for me and for the reader.
Therefore, here is another short chart analysis.
The last few months were peculiar. DJI began diverging away from the other main indices, SPX, NDQ. A significantly strong movement of DJI the last few months brings hope to the Equity Bulls.
A fast and high-reaching Bull Run.
A discrepancy between indices is not necessarily hopeful. In classic Dow Theory, when different parts of the market moved differently from others, it signaled an alert that deserved attention. As a classic example, when the railroad index didn't confirm the general index growth, this could have been bad news. While the Dow Theory is replaced from more modern methods, it is fun looking back and analyzing using the most classical of methods. It certainly gives a new perspective into what we analyze today.
While price discounts all, relationships matter. SPX, DJI etc don't live on their own. Their price is highly subject to the fundamentals of the economy, which are hard to calculate. The only thing we can do is take the fundamentals into equation, and make a retrospect analysis into some charts, just to get some perspective.
I will now explain why I believe such a discrepancy occurred. An exotic chart follows, making some calculations on DJI.
Later on you will understand what this chart means. Similarly for SPX:
It appears that there is a fundamental ceiling above. And DJI just upthrusted to reach it.
Fundamental ceilings like these cannot be predicted. We can see them from their effect in long-term charts.
In 2022, what we lost in Equity value, we gained in Dollar strength. Therefore we calculate DXY*DJI to get some perspective of the absolute DJI price. It is sort-of the price of DJI relative to the world economy.
While there are similarities to 1995 - and while anything could happen - I believe that this is a fake-out. But the future of Equities might not be like we expect them to be.
The post-2020 period is a period that resembles a blow-off top.
In my 1-year experience, DXY and Equities depend on the Yield Curve. We all know that, the Yield Curve has significant importance in calculating Equity performance.
While short-term movement depends on the yield curve, the long-term movement depends on long-term yield rates.
And this correlation between the Yield Curve and DXY makes sense.
The yield curve represents the "rate money is created out of thin air". It's inverse represents the "rate money is destroyed".
DXY is a measure of dollar strength. Strength of currencies depend on many factors (most of which I don't have the knowledge to analyze). One of these factors is currency scarcity coupled with interest rates.
With all of that we can conclude to the following consequences of a possible dominance of the dollar.
-- It is obvious that dollar dominance will lead DXY much higher.
-- Money Supply is rapidly decreasing. The FED is dedicated into killing inflation.
-- A correlation between DXY and the inverse of yield curve might lead to the following conclusion:
A decisively high DXY needs a deep yield inversion. And perhaps we are stuck with a multi-year yield inversion.
Price might get rejected upon attempting to enter the long-term formation. It will have significant trouble re-entering the money-creation-area (positive yield inversion)
As for the effect in equities, things are quite complex...
For the following charts, I will be replacing DXY with the yield-curve, which is the fundamental movement that affects dollar strength.
Until now, Equities haven't felt the effect of the Yield Inversion.
This may soon change. Price reached a significant retracement and with a sloped ceiling, bearishness is apparent.
This chart is concerning for equities. It describes the absolute strength of the Equity Market. And with so significant divergences in such a big scale, it comes to show the sheer scale of the damage that might be coming in equities. And it will be real damage, damage that we haven't already felt.
All of these are calculations are in relative performance. It is hard to calculate the effect in equities in absolute terms.
One thing is for sure: A deepening yield inversion will keep the real equity prices higher for longer. Therefore we cannot calculate anything while we are in this upside down period.
And who knows... The recession everybody expects may never come. If the yield curve is negative for years, the dollar will be making higher highs in strength.
And a strong dollar isn't necessarily bad for equities. It is in the hands of corporations to keep the game going, and investors happy. In the years to come, the equity market may not be able to make new all-time highs. But this is not a lose-lose scenario for equities. Companies instead of rewarding investors with higher index prices, they can reward them with higher dividends.
After all, an investment in dollar-denominated markets is like investing in dollar itself. And if you believe in the Dollar Milkshake, then everything measured in dollar is most definitely for you!
The recession everyone is convinced that is coming, may never come.
Capitalism has worked tremendously well for the US.
QE and the Stock Market mania fed the .com bubble.
Who knows, maybe QT and the Dollar mania may feed another bubble.
Capitalism and money work in mysterious ways... Bubbles and Recessions come when nobody expects them to come.
With so much money printed, we either created a recipe for disaster, or a recipe for the biggest bubble humanity has ever seen.
Who knows what the effect might be if that money supply is put to work.
And with such a significant shift in Bonds (from long-term bullish to long-term bearish), the money invested in them will eventually leave the Bond market and seek other adventures.
No matter what happens, the future is scary and exciting!
Tread lightly, for this is hallowed ground.
-Father Grigori
There are too many charts that I want to talk about. I could post them as "updates" to my earlier ideas. But this would be confusing for me and for the reader.
Therefore, here is another short chart analysis.
The last few months were peculiar. DJI began diverging away from the other main indices, SPX, NDQ. A significantly strong movement of DJI the last few months brings hope to the Equity Bulls.
A fast and high-reaching Bull Run.
A discrepancy between indices is not necessarily hopeful. In classic Dow Theory, when different parts of the market moved differently from others, it signaled an alert that deserved attention. As a classic example, when the railroad index didn't confirm the general index growth, this could have been bad news. While the Dow Theory is replaced from more modern methods, it is fun looking back and analyzing using the most classical of methods. It certainly gives a new perspective into what we analyze today.
While price discounts all, relationships matter. SPX, DJI etc don't live on their own. Their price is highly subject to the fundamentals of the economy, which are hard to calculate. The only thing we can do is take the fundamentals into equation, and make a retrospect analysis into some charts, just to get some perspective.
I will now explain why I believe such a discrepancy occurred. An exotic chart follows, making some calculations on DJI.
Later on you will understand what this chart means. Similarly for SPX:
It appears that there is a fundamental ceiling above. And DJI just upthrusted to reach it.
Fundamental ceilings like these cannot be predicted. We can see them from their effect in long-term charts.
In 2022, what we lost in Equity value, we gained in Dollar strength. Therefore we calculate DXY*DJI to get some perspective of the absolute DJI price. It is sort-of the price of DJI relative to the world economy.
While there are similarities to 1995 - and while anything could happen - I believe that this is a fake-out. But the future of Equities might not be like we expect them to be.
The post-2020 period is a period that resembles a blow-off top.
In my 1-year experience, DXY and Equities depend on the Yield Curve. We all know that, the Yield Curve has significant importance in calculating Equity performance.
While short-term movement depends on the yield curve, the long-term movement depends on long-term yield rates.
And this correlation between the Yield Curve and DXY makes sense.
The yield curve represents the "rate money is created out of thin air". It's inverse represents the "rate money is destroyed".
DXY is a measure of dollar strength. Strength of currencies depend on many factors (most of which I don't have the knowledge to analyze). One of these factors is currency scarcity coupled with interest rates.
With all of that we can conclude to the following consequences of a possible dominance of the dollar.
-- It is obvious that dollar dominance will lead DXY much higher.
-- Money Supply is rapidly decreasing. The FED is dedicated into killing inflation.
-- A correlation between DXY and the inverse of yield curve might lead to the following conclusion:
A decisively high DXY needs a deep yield inversion. And perhaps we are stuck with a multi-year yield inversion.
Price might get rejected upon attempting to enter the long-term formation. It will have significant trouble re-entering the money-creation-area (positive yield inversion)
As for the effect in equities, things are quite complex...
For the following charts, I will be replacing DXY with the yield-curve, which is the fundamental movement that affects dollar strength.
Until now, Equities haven't felt the effect of the Yield Inversion.
This may soon change. Price reached a significant retracement and with a sloped ceiling, bearishness is apparent.
This chart is concerning for equities. It describes the absolute strength of the Equity Market. And with so significant divergences in such a big scale, it comes to show the sheer scale of the damage that might be coming in equities. And it will be real damage, damage that we haven't already felt.
All of these are calculations are in relative performance. It is hard to calculate the effect in equities in absolute terms.
One thing is for sure: A deepening yield inversion will keep the real equity prices higher for longer. Therefore we cannot calculate anything while we are in this upside down period.
And who knows... The recession everybody expects may never come. If the yield curve is negative for years, the dollar will be making higher highs in strength.
And a strong dollar isn't necessarily bad for equities. It is in the hands of corporations to keep the game going, and investors happy. In the years to come, the equity market may not be able to make new all-time highs. But this is not a lose-lose scenario for equities. Companies instead of rewarding investors with higher index prices, they can reward them with higher dividends.
After all, an investment in dollar-denominated markets is like investing in dollar itself. And if you believe in the Dollar Milkshake, then everything measured in dollar is most definitely for you!
The recession everyone is convinced that is coming, may never come.
Capitalism has worked tremendously well for the US.
QE and the Stock Market mania fed the .com bubble.
Who knows, maybe QT and the Dollar mania may feed another bubble.
Capitalism and money work in mysterious ways... Bubbles and Recessions come when nobody expects them to come.
With so much money printed, we either created a recipe for disaster, or a recipe for the biggest bubble humanity has ever seen.
Who knows what the effect might be if that money supply is put to work.
And with such a significant shift in Bonds (from long-term bullish to long-term bearish), the money invested in them will eventually leave the Bond market and seek other adventures.
No matter what happens, the future is scary and exciting!
Tread lightly, for this is hallowed ground.
-Father Grigori
Catatan
The NDQ bubble is showing significant signs of weakness.Catatan
As money gets scarce, bubbles cannot find money to be fed. Instead, they opt for an alternative, derivatives at a fraction of the price.Catatan
One note regarding the yield curve.It appears that there is significant divergence in recent price action.
This means that an inversion may last several months, but probably not for much longer.
Catatan
Ideas like these look too ridiculous and too optimistic for them to be true.When we expect one thing to break, another breaks.
Last year proved a period when both tools of an investor broke.
A common investment scheme, shared between equities and bonds, would definitely lose money last year. A significant trend change took place.
In the years to come, the challenge of the investor will be not to get trapped in a lose-lose scenario aka. 2022.
The following chart tells an interesting story:
Too much money was printed in 2020-2021. That money was too much for DJI to be as low as it is.
In other words...
DJI is too low for money supply to be as high as it is.
Question is: Will DJI reach up to M2SL, or will M2SL decrease to DJI levels?
In both cases, Equities get strengthened.
If DJI increases 20% to reach current M2SL levels, then obviously equities will have performed well. And suddenly my idea is not that crazy after all...
If M2SL decreases by 16% (the inverse of 20%) and DJI remains in current levels, then DJI will again have performed well. It would have created wealth.
Catatan
It's the classical investment scheme that failed last year. The equity-bond pair.Equities are still in a technical uptrend. Either we like to see it or not.
Catatan
And the classical investment scheme has shown signs of failure for many many years. The following chart is a long-term replacement to the SPX*TLT chart.Catatan
The recent price action in equities, smells like a blow-off top. And a big-timeframe one.Catatan
While long timeframe charts support the bearish bias, short term higher-highs could be made in equities.Catatan
The KST-based MACD indicator is very useful for my analyses.The zero line however is pretty meaningless in my experience.
Instead, I opted for a "profile" indicator.
![Profile Any Indicator [Kioseff Trading]](https://s3.tradingview.com/r/RSZxyvmd_mid.png)
This incredible indicator by KioseffTrading helps me make a clear barrier around my indicator.
The red centerline provides a point of reference, while the bounds work as overbought/oversold levels.
The histogram is added in a separate window to make charts clearer.
Catatan
Trend analysis and long-term peaks can be tricky to pinpoint.Peaks and Troughs must confirm by many timeframes.
In the 4M chart, the KST-based MACD has called the peak. Historically, the 4M chart is an early-teller of peaks.
The 6M chart shows that we are in the late stages of an uptrend.
These charts suggest that the Equity/Commodity ratio may increase slightly in the months to come.
The ribbons must confirm one another...
Finally, when a trend is violated, we must zoom out and manage our expectations.
Catatan
Many believe GameStop is going to drop in valuation.I like going against the flow, whenever my analysis demands me to.
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