Why Did Stocks Rally Last Week?

Stocks were in need of a catalyst and they got it last week with the US inflation rate coming in at 7.7% which was lower than the 8.0% expected.

A two day rally ensued taking the NASDAQ higher by 9%, the S&P 500 6%, and the TSX 4%.

The lower than expected inflation print gave market participants some confidence that inflation is easing and the Federal Reserve may not have to continue their aggressive rate hikes.

It wasn't just stocks that responded. The hope of a Fed "pivot" or a "pause" ignited a rally in bonds, a pullback in interest rates, and most importantly a sell-off in the US dollar which put a nice bid under the stock market. 

We've been watching the steepening slope of the US Dollar Index for a couple of months. Why? Because as the slope gets steeper, price becomes unstable leading to a sharp correction. 

We see this price action all the time when an asset rallies longer and faster than most people think possible. Think of Bitcoin or Lumber in early 2021. Or stocks like Peloton and Zoom in the few months after the Covid crash.

The US dollar index went parabolic and at some point mean reversion was going to occur.

Stocks have been trading inverse to the US dollar for almost a year. So, a weaker dollar would more than likely lead to a rally in stocks.

And that's exactly what happened.

So, we got a rally in stocks on a weaker USD and inflation data. But now what?

In my next email we will take a look at how far this bear market rally could go.

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