Over the course of July, the S&P 500 continued making incremental progress higher, with multiple new all time highs, despite a weak June, and a weak start to the month. However, while the stock market has been hot, the US dollar has been decidedly not so hot. The greenback has fallen about 8% over the course of 2017, and has logged five consecutive monthly closes as of today.
The weak dollar in the near term has provided a tailwind to corporate earnings and stocks by extension to a certain degree. The macro picture may not be as rosy looking further out, though. The weak dollar gives broader latitude to the Fed to raise rates and trim its balance sheet, and with a heavily oversold dollar, a bounce may be due in short order, which on its own could have significant market implications.
For the time being, though, the market trend appears higher, albeit at a downshifted pace. A new overhead level of resistance is emerging, signaling a downward inflection of the rising range in which the market has traded for most of 2017. The light blue channel at the top of the 30 minute chart represents a “sell level” indicator if the broader light blue channel is to hold for the duration of the summer. Should we break out of this level, we could see the market rally substantially higher in a hurry, but this is a less likely scenario in my estimation.
Should the S&P 500-US dollar divergence begin to close, the market has plenty of room to move to the downside without suffering a critical rising trend breakdown. The market has substantial support levels at 2426 and 2390, both of which if revisited would present great long side entry opportunities for a resumption of the longer term bull market. Below those levels, there is a lot of air until the 2290 and 2150 levels are reached, should a significant correction be in our near future, though a revisit of these levels are pretty unlikely for some time.
While caution is warranted with the market trading at more than fully valued levels, the most likely scenario for the rest of the summer is a slow gradual rally with small speed bumps. As always, keep your eyes peeled and good luck out there.