The machines run wild like a herd of buffalo, and yesterday was no different. The equity market was down yesterday pretty much across the board. Then, suddenly, around 2 p.m. the S&P 500 (NYSEARCA:SPY) seemed to suddenly bounce around the 2128 level and moved up to close 10 points off the low at 2137. Sorry folks, but the machines are in charge, with very little if any help from humans these days. Why else would the S&P 500 suddenly stop at 2128 and sharply turn? I'll show you.
You see the reason for the bounce? That teal trendline? That teal trendline is the line that has been supporting this market since the February lows.
How important is this level? Very. The bulls will defend this level with all they have. This level was born on the February lows and stood firm on the Brexit lows. This is the level the bulls will defend.
Sometimes markets move for no reason; yesterday was a prime example of that. Higher yield and a strong dollar started the sell-off, then the machines kicked in probing for weakness until they found a level of strength and they did. Thus far today we have, and my hunch is that we bounce off this February trendline, back toward 2145.
Where else were the machines let loose yesterday? The biotech sector (NASDAQ:IBB) was crushed. Like the S&P, the IBB was put to the test. The machines pressed the ETF and, as a result, the group fell until it found support. The support level it found was the $277 level, which we had just spoken about yesterday.
The $277 level is of the utmost importance again to the biotech group.
This $277 support area was born the day after the break-out on July 21 was tested, after "Clinton Almost Killed The Rally." Once again, we tested it yesterday. How important is the level? Very. You can see the machines checking, in fact, already early this morning.
Currency and Yields
The machines are also pressing the euro (NYSEARCA:FXE) this morning, now barely holding on to a 1.10 handle.
And the yen (NYSEARCA:FXY) looks set to start weakening materially.
I have even decided to trace out a new trendline in green.
The 10-year (NYSEARCA:TLT) continues to creep up in yield and is now at 1.79%.
How Should We Interpret This?
There are clearly some significant shifts happening currently in the market, and they all seem to be picking up steam. The dollar (NYSEARCA:UUP) is intent on strengthening, and yields are intent on rising. These two things can become disastrous for the commodity sector, most notably commodities such as gold (NYSEARCA:GLD). The GLD is now back to pre-Brexit levels.
It is bearish on materials and material producers (NYSEARCA:XLB).
Additionally, if the equity market begins to worry about what a stronger dollar means for U.S. multinationals, then it will begin to pressure the equities. In my view, the machines were nothing more than probing yesterday, pressing the markets to find support levels.
Was I Right?
Perhaps, when I wrote on Sept. 7 in regard to the rise in Libor rates:
Whatever the case, foreign investors want to and are willing to lend in dollar terms and borrowers are willing to pay higher rates, to get them. Perhaps for now this is a case of uncertain times around the world and some would rather own dollars? This thought process would imply foreign investors believe they could have a currency devaluation greater than the 90 bps they are paying to borrow the dollars.
Perhaps Libor rates and eurodollar rates were correct. The rising rates in both of these parts of the market were forecasting a fear of a strengthening dollar and weakening foreign currencies. That is actually what we have now been witnessing. In fact, three-month Libor rate is, as of yesterday, at 0.8775% and 12-month Libor was 1.59122%. This move higher likely had little to do with the new SEC rules on Money Markets as that rule goes into effect on Thursday. Since the market was well aware of the new law coming into force for nearly two years and had ample time to prepare for it.
Yesterday, the equity market for the first time began to worry about what a rising dollar and higher yields (NYSEARCA:HYG) meant. The machines went into overdrive and began to press. It seems likely that the dollar and yields will only to continue to strengthen in the coming weeks. Of course, this means the machines will probably be probing again at some point shortly. The bulls will have to have to be on defense and ready to defend some of the levels we have mentioned.
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