The Dollar Index chart highlights an inverse hammer candlestick reversal that shaped out on Friday, while the Dollar Index rallied initially and then sold off during the day, therefore the distribution of the daily candle has been left open to the upside, for the DXY to technically bounce back above the 200 days moving average. The MACD oscillator also has been forming a bottom in oversold conditions, which could also be a signal of the Dollar Index drifting higher, with a possible 6.8% upside going against the diagonal trendline.
Dollar Index Metrics
The average statistical Dollar Index value for the past ten years has been DXY 92.4, the Median 94.47, while the Mode 97.39, which means a negatively skewed distribution, in fact, the Dollar Index statistical distribution of prices has been -23.8%, meanwhile, the % returns of holding the Dollar Index have been -2.12%, therefore not ideal to consider a long exposure to the Dollar Index. The nature of this trade-off mutatis-mutandins improves with higher interest rates earnings for Dollar cash holders, compare and contrast with the past decade of negative-yielding returns for Dollar cash deposits.
With the Dollar Index possible drift higher, then that would determine a risk-off momentum for stocks.
In the past ten years, the market returns of the S&P500 have been 12.29%, indeed on top of that investments funds at investment banks will need to generate profitability in excess of 16.35% market risk premium in 2023 in order to produce positive net real returns for their clients’ money, all considered with a risk-free rate of 4.0%, that will have to increase over time.
Hence, the prospects of positive net returns going forward with a higher risk-free rate become even more challenging for fund managers. In this context, it’s possible to see that the S&P500 could see an overall negative drift lower (29%), which for fund managers that decide to position net short the market, would eventually provide returns in excess of 16.35%.
However, not considering the market positioning of fund managers and investment banks, with the S&P500 chart on a daily timescale, it’s possible to see how the SPX has pinched the trendline and started a sell signal of a trend reversal to the downside, while the MACD oscillator also could be on the cusp of a double top bearish pattern and turning slowly lower.
MARKET SCENARIO GOING FORWARD
The S&P500 has provided 12.29% returns in the past ten years, with a yearly standard deviation of 17.2%. Considering a downside scenario of (29,08%) that would be a 1.68 sigma, with a 12.73% net positive investment return above the 16.35% market risk premium and effectively would be in line with the statistical metrics of the SPX.