Monday’s Big Tech Rally Looks Suspicious

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Any market pundit will happily, sagely tell you that not every day in the market needs an explanation. Monday’s move does. Four percent rallies (intraday) are not easy to come by, even by this bull market’s standards, and with recent bullish relationships not holding in yesterday’s action, it behooves us to dive deeper into the session.

Notably absent in Monday’s big move was a concurrent drop in the dollar. The S&P and the dollar have been steadily inversely correlated since March, and dollar declines have been associated with policy efforts to loosen financial conditions. In fact, the dollar is well-bid as I update this article on Tuesday.

Investors have been hyper-focused on the possibility of fiscal stimulus since the September bottom, evidenced in large part by a quick drop in the dollar last week. To see none of that weakness as the market surged Monday was odd. China’s move to weaken the Yuan likely played some role in the dollar’s stability, but still, it’s surprising to see such a powerful move in the stock market without any corresponding move in the greenback, at least judging from recent market relationships. With no dollar decline, it’s difficult to argue that incremental stimulus hopes are responsible for the rally. On top of that, fiscal news has been more closely tied with cyclical-stock strength, of which there was little on Monday.

It’s certainly possible the market could rally as the dollar stays firm or strengthens (as was the case in 2019), but that would mark a change in 8-month trend and there’s no clear reason as to why that would be the case. Perhaps if the U.S. reopening hastened and our economy improved markedly next to peers; not impossible, if our current COVID wave stays contained compared to Europe’s current debacle.