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Updates 1:15 AM EST- Monday 6/21/21
The week ahead
There was much excitement last week with the big FOMC announcement on Wednesday 6/16 and quad witching on Friday 6/18. This week won't be quite as big, but there are a number of important economics reports being released. Attention will continue to focus on the key topics: inflation, yields and the US dollar.
While the stock market had a knee-jerk reaction to FOMC announcement, the bond market gave a very clear signal on Thursday and Friday. Bond traders were not selling. Instead, they were buying 10-year and 30-year Treasurys (IEF, TLT), sending 10-year and 30-year yields down sharply, not up.
If you look at TradingView US10Y AND US30Y weekly charts, you will see that they have been down since 3/15. And they are dropping right now as we write this.
This tells us that bond traders are not that worried about inflation, or an overheated economy. Us stock traders should take our cue from that, instead of the fretting headlines.
However, we cannot trade based on macro economic conditions alone. Good old $VIX $VXN $RVX charts tell us that there may be a few days of volatility and selling still. But then conditions will likely turn bullish for $SPX $NDX IWM to resume their climbs.
Finally, we want to mention a couple observations about the US dollar. It is definitely climbing as an asset, bolstered by the fact that the US economy is probably stronger than many others right now. But what impact does the rising dollar have on Treasury yield? Well, it's an interesting circle of effects.
According to WSJ in early June:
The cheapest dollars in years are spurring a rise in foreign investment in U.S. government bonds at the same time that pension funds are boosting their holdings—and that demand pickup could weigh on Treasury rates even as the economy strengthens....
According to WSJ last week:
Higher interest rates in the U.S. make investing in American bonds more attractive to foreigners, and can increase demand for the dollar from overseas. Treasury yields rallied their most in three months after the Fed’s disclosures Wednesday, helping bolster appetite for the dollar.
So there you have it. The demand for Treasury bonds is unlikely to drop because even though the dollar is rising, rates are expected to rise and will stimulate demand.
Read the rest of this analysis, and get the latest entry/exit signals for SPY QQQ TQQQ IWM SPX NDX based on VIX here.