It seems as if the bulls got their juice back after two days of solid gains. But I would caution that despite two intense days, volume levels were pretty anemic, and despite the S&P 500 and the Nasdaq rising on Friday, the advance-decline fell. These divergences are minor but speak loudly about the underlying health, which suggests not much improvement was seen.

When looking at what took place, it is very apparent that the dollar’s drop on Wednesday triggered a risk-on rally, which resulted in volatility sellers coming back into the market, as evidenced by a falling VIX index and rising SKEW index. The dollar is perhaps the most important asset you can watch presently, as a rising dollar is a risk-on killer, and the more it rises, the more pressure it will put on global markets.

I’m not going to stick my neck out on the line to say the market won’t make a new high. Frankly, with the S&P 500 about 2% off of its highs, all it would take is one good day and for no reason at all for that to happen. But what I am willing to say is that with VIX around 16 and the dollar index at 94, I would be cautious in this market.

As I have said, buying the dip has worked because of the continual collapse in the falling VIX index and the dollar. That has changed, with the VIX now at the pre-COVID-19 levels and a dollar that should continue to strengthen.

That means the market going higher will be very challenging. On top of that, the fundamentals are slowly shifting, with the number of downward revisions for 2022 now outpacing the upward revisions. In the meantime and more importantly, sales estimates for the S&P 500 are falling in 2022 and 2023, and unless margins are expanding, which, given the higher input cost, it seems hard for me to believe margins will expand even further next year.

S&P 500 (SPY)

S&P 500 futures volume was weaker on this rally than last week’s rally and the Sept. 23 rally. This week’s rally looks an awful lot like those two rallies, with the futures rising three days in a row on those occasions. The futures still need to make a decisive close above 4,470 before we can start thinking about the S&P 500 returning to its highs.

Now I know everyone is excited about the reverse head and shoulders pattern, and it could very well be that bullish pattern that everyone on Twitter thinks that they alone have discovered.

But I would caution that head and shoulder patterns are not always reversal patterns, and instead they may be continuation patterns. On the chart below of the KOSDAQ, there are two clear head and shoulder patterns but instead of the KOSDAQ turning lower, it continued the advance higher.

Dollar

What ended up driving stocks higher on Thursday and Friday was a sharp decline in the dollar index, which brought the volatility sellers back. The chart below shows the inverse of the dollar index and the S&P 500. It shows how tightly the dollar and S&P have followed each other since Jackson Hole.

But if the dollar starts to rally again, which I think will given the dynamics of what is taking place in rates, and with the Fed likely to start reducing QE in two weeks, the S&P 500 will lose that risk-on sentiment.

VIX

It is pretty easy to see that volatility sellers were back at the end of last week with the VIX falling and the SKEW rising. With implied volatility falling, it sent the market rocketing higher.

2-Year Treasury (SHY)

Also, the 2-year bill broke above 38 bps for the first since the spring of 2020, which could be a significant level. This break higher could lead to the 2-year rising to the next important resistance level.

Amazon (AMZN)

Amazon shares jumped sharply last week following the stronger-than-expected retail sales numbers. However, the stock is still entrenched in an overall downtrend, which needs to be broken. A break of that downtrend could send the shares higher towards $3,520.

Freeport (FCX)

I saw bearish options betting early last week in Freeport, and with the dollar strengthening, it made sense that the shares could fall. But then Wednesday came and the dollar fell sharply, and thus Freeport exploded higher. I’m not sure how much further it can rise. If it clears resistance at $39.20 and the dollar weakens more, I suppose it could even climb to $41. Not a good week for me overall.

Netflix (NFLX)

Netflix will report results this week, and given how much this stock has moved up due to the show Squid Game, it would seem as if expectations are sky-high. The third quarter is generally a solid quarter for Netflix, and the fourth quarter is usually better.

This means the company will need to deliver significant net addition guidance. It is worth noting that there is a bearish divergence forming on the chart with the stock rising and the RSI trending lower, suggesting that momentum is starting to fade fast.

Google Trends does not suggest anything special is going on for Netflix, so this may be a 'buy the rumor, sell the news' story.