Friday, 28th January, 2022
1/ Tech sector leads market surge after Apple’s report
2/ Dollar’s strength doesn’t hinder stocks
3/ Is this trend something to be concerned about?
4/ The bottom line
1/ Tech Sector Leads Market Surge After Apple’s Report
Apple’s (AAPL) quarterly report carried enough good news about product sales that it almost single-handedly turned the downward tide in the markets since 2022 began. Tech sector stocks led the resurging indexes higher in heavy trading with the S&P 500 index (SPX) closing 2.5% higher. The tech behemoth beat estimates handily confounding the bearish expectations many investors had for them.
The chart below details the price action for State Street’s sector ETFs. Notably the energy sector ETF (XLE) fell today after being the only sector in positive territory since the beginning of the year. But the technology sector ETF (XLK) is the clear leader of the bunch for today.
The one-day jump for XLK makes a steeper climb than any other sector ETF, with the consumer discretionary sector ETF (XLY) being the next best performer. These two sectors leading the others is consistent with bullish market behavior.
2/ Dollar’s Strength Doesn’t Hinder Stocks
The conventional wisdom is that inflation is usually accompanied by a decline in the value and purchasing power of the dollar. As the chart below displays, the trend of U.S. Dollar Index (DXY) shows that this has not been the case over the past six months. While inflationary influences are strong enough to bring concern from the Fed, these influences have have been accompanied by three other influences: a strong labor market, rising interest rates, and the weakening of other major currencies.
The Fed’s talk of raising its own rates has influenced the market lending rates of the banking industry. In the chart below the 10-year U.S. Treasury Note Yield Index (TNX) shows a very similar upward trend over the same period. Coinciding with this correlation is the fact that an inverse trend can be shown by other currencies. The light green line shows the combined value of four Invesco CurrencyShares ETFs for the euro (FXE), Japanese yen (FXY), the British pound (FXB), and the Aussie dollar (FXA).
The fact that those currencies are all in a downward trend compared to the dollar is helping to keep the greenback’s purchasing power strong on a global stage. That is a big part of why stocks may continue to rise even if the dollar does also.
3/ Is This Trend Something to be Concerned About?
The Cboe Volatility Index (VIX) fell strongly today coming off of significant highs corresponding to the market’s swoon over the past two weeks. The chart below shows that the past six months have brought increasingly volatile trading conditions—so much so that the VIX has been in an upward trend all that time. It is historically unusual for the VIX to maintain an upward trend while stocks are on the rise.
Experienced chart analysts would say that this kind of divergence between market prices and market volatility presages a strong bear market in the near future. However, with today’s market action and the positive news from both Apple and Microsoft (MSFT) this week, it seems unlikely that the market is headed for significantly lower prices.
4/ The Bottom Line
Stocks rebounded today following the news from Apple that consumers were still willing to spend more money on everything they make. The tech sector led, not held back by a strengthening dollar trend and high volatility.
Originally posted on 28th January, 2022
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