Stocks fell sharply Tuesday, with the consolidation patterns noted on Monday in both the and the breaking below the lower end of their recent trading ranges. Clearly, there will need to be follow-through to confirm the move. However, with reporting earnings after the close today and the report due on Thursday, I would not be surprised to see implied volatility continue to rise, and the indexes remain under pressure.
The same occurred in the Nasdaq 100, which also fell sharply on the day by more than 3% and broke out of its consolidation phase.
Tuesday’s move could very well be the start of something larger. The indices have been driven higher by an extraordinary rally in semiconductor stocks, which have powered much of the advance. We also know that a significant portion of the move was driven by options flows, and who knows what role leveraged products may have played.
The point is that the index can fall sharply if the stocks that drove it higher begin to fall sharply. And there is no way of knowing how far those stocks could decline because nobody really knows what they are worth. In fact, when someone argues that Micron trades on a low P/E ratio, that is usually the first warning sign that they do not really understand the stock or the sector.
In theory, I do know what these patterns suggest could happen based on historical precedents and my own experience. But in reality, it is a thankless exercise: if I am right, I get no credit; if I am wrong, I get all the blame. So I am going to pass on that one. You can thank everyone who came before you for that.
Meanwhile, the continues to show strength and has now easily cleared resistance. The only question that remains is whether the dollar can break above 101.75. If that happens, there is room for it to move higher against the , , and .
The Swiss franc is another good example, with pushing up against 0.81. A breakout above that level would likely lead to further dollar strength, potentially carrying USD/CHF all the way to 0.847.
I know that a stronger dollar is supposed to tighten financial conditions, but so far we haven’t really seen that happen. To this point, cross-currency basis swaps have shown very little tightening, suggesting there has not been a meaningful increase in demand for dollar hedges despite the dollar’s strength.
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