Dollar Decline Sparks Rally?

Why? That was a big question I heard today through many sources and my response has been… Why ask Why? When markets are driven by news and emotions this happens, simply stated. This is my reason for stating, several times, neither the buyers or the sellers have conviction relative to direction. Today was no different than yesterday or the day before… The driver today was news about the weaker dollar, and Greece hopes are alive of more funding… maybe? Yes, the dollar index did fall to the 94.60 and well off the 100 high in March… but, does that justify the rally today? No, but then in a news driven market it doesn’t have to make sense or offer any logic it is news after all, and following roughly a 3% pullback, it was enough to push the major indexes up 1%. It is what it is, and attempting to apply logic at this point in the process will only make you head for the liquor cabinet at the 4 pm close on Wall Street. The good news is today you could afford booze. The bad news is tomorrow is another day.

The two sectors showing the most promise from the bounce was financials (XLF) and consumer discretionary (XLY). They were not the biggest gainers, but the moves impacted the look of the charts in a positive light. XLF broke out of the recent consolidation and push to near term high. XLY bounced off support and back near the top of the current trading range and back in position to continue the uptrend. Both are worth watching and managing as we go forward to add to positions if the move is sustainable.

I am going with this being a technical bounce off some key support levels and now we see how far it goes before the sellers stick their noses into the mix. Hanging your hat on a Greece resolution is temporary in nature and doesn’t really change the economic landscape in Europe or the United States. A weaker dollar is not going to change the immediate impact on the economic picture. Put it in perspective and you can understand the head scratching that went on today.

Crude oil was higher again today closing near the $61.15 mark and pushing back near the current highs of $61.60. Supply data showed a reduction in the US and that was the positive for the move higher… evidently some people knew that yesterday when crude climbed more than 3%. Trading range in the commodity is still in play… I would give some credit in this move to the declining dollar. If the weakness in the buck continues we may very well see further upside and a break from the current range in crude.

The weakening dollar was good for commodities overall… according to some headlines. Gold did rise nearly 1% on the day. However, grains were lower along with other soft commodities. Natural gas continued the climb on the bottom reversal three days ago. Emerging markets were a benefactor as well with a positive bounce and setup for a bottom reversal as well. Worth watching the dollar trend relative to these sectors and other going forward.

The ten-year bond gained to 2.47% up six basis points on the day. The rally in the yield is have a negative impact on the bond (down 4.5% since high in April) and other interest sensitive assets. Even if the Fed hikes rates 25-50 basis point the bond has already climbed 50 basis points in the last eight weeks. Now the values are approaching oversold from a logical viewpoint. The challenge is emotions are in play not allowing room to think through the process looking forward.

Bottom line take away on the day… it was a day for the buyers. There is still plenty on the plate to be resolved and I would expect more volatility along the way. All we can do is take this one day at a time. Stay alert, manage your risk and let it play out. Tomorrow is another day.