Dollar drops and stocks spike on Thursday

Thursday, March 12, 2015 -

U.S. stocks rose in a broad rally on Thursday, bouncing back from two days of losses, helped by weaker retail sales that paused the dollars recent rally and tempered the outlook for higher interest rates.

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Stocks rebounded on Thursday after several sessions of selling as the U.S. dollar strongly pulled back, reflecting a typical inverse relationship between equity values and our country’s currency value.

The major indexes held the early gap gains, even advancing in the last hour of trading, ending the day near the intraday highs. The Dow jumped 260 points (-1.5%) to 17,895, the Nasdaq climbed 43 points (-0.9%) to 4,893 and the S&P 500 surged up 26 points (+1.3%) to 2,066. The NYSE finished at +1.33% and the small cap Russell 2000 at +1.72%.

Volatility has re-entered the picture in a big way!

Most analysts attribute today’s spike rally on to a strong pullback in the U.S. dollar, which gave back ground following a long period of strength.

Dollar plunge provides cover for weak data

After selling off rather hard in the month of March given the tremendous surge in the U.S. dollar, the dollar corrected today and the euro stabilized and the stock market rallied.

Despite a correction in the dollar, oil prices fell $1.12 to $47.05. Typically the inverse relationship between oil and the dollar is pronounced even in intraday trading, so it is unusual to see both the dollar and crude oil pull back at the same time. This rare drop in both crude and the dollar didn’t stop the investment banks from goosing the market. In fact, they saw the dollar drop as an excuse to ramp equities today.

I guess today was a bad news is good news for equities amid continuing decline in economic data being released.

Today it was reported that tetail sales declined 0.6% in February after declining 0.8% in January. Expectations were 0.3%, so this falls far short, with three months of declining retail sales numbers. Auto purchases dropped by the most in more than a year and Americans spent less at restaurants and home improvement stores. It is hard to spin these numbers. Some may blame the inclement weather in the Northeast as a contributing factor but our supposedly robust job hiring over the last 12 months and lower gas prices have yet to boost spending.

In fact, given the poor retail sales number the Atlanta Fed has now downgraded its first quarter GDP forecast to just 0.6%! This is just like last year when the GDP was overstated in Q3 only to drop like a rock in the next Q1.

Naturally, the plunge in retail sales numbers brought out the financial powers to secure price control of the stock market as the media argues the Fed is less likely to raise interest rates but it is clear, the economy is getting further into trouble while the Fed is constantly intervening.

Wages and Whipsaws

What I think is troubling is in the following chart of wages of production and non-supervisory employees that represents about 80% of the workforce.

This chart shows a steady downtrend of wages for most of the workforce and especially over the last six months. Is it any wonder that retail sales are declining? What this also illustrates is confirmation of job quality in decline as part time jobs dominate in new jobs numbers and also dominate in lowered take home pay.

The stock market is subject to whipsaws in both directions as we have seen over the last few months but it’s not getting anywhere. Stocks are not far from completing the strongest part of the seasonality cycle, which ends at the mid-point next month. Then seasonality begins to turn down again as we approach May.

Presently, as shown by the Russell 2000 index, prices are at the top of the weekly Bollinger Band line pushing into intermediate-term overbought condition. And like we showed with the NYSE yesterday, the small caps have made little progress in over a year.

Crude oil prices fell another $1.12 today and the Russell is loaded with energy plays. The intermediate-term cycle for oil is just starting to roll down again, so should oil keep falling, coupled with worsening economics, the risk of an even greater correction looms over the broader market.

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