Investors should exercise caution with stocks and bonds as the U.S. dollar shows potential for a bounce, according to a recent note from BTIG.
Despite the initial market enthusiasm following Federal Reserve Chair Jay Powell's dovish speech at Jackson Hole, BTIG suggests that the rally may not have much further to run.
The firm notes that while the market is trending higher, there is "no rush to push all your chips in right here," particularly as we approach a seasonally weak period.
BTIG highlights that small-cap stocks remain above key breakout levels but advises caution, especially with the potential for a relative trend shift.
They add that rate cuts could support small-caps if economic data holds up, but analysts recommend a careful approach.
On the sector front, BTIG points out that real estate investment trusts (REITs) have been the best-performing sector in the second half of the year so far.
However, they advise keeping a "tight leash" on this sector due to its high correlation with interest rates and the possibility of bonds inflecting lower. The firm also emphasizes that the semiconductor sector is at a critical juncture, with key indices like the SMH ETF approaching significant resistance levels.
As we enter September, historically a challenging month for bonds and a strong one for the dollar, BTIG sees an "interesting set-up across asset classes."
The dollar index (DXY) is described as "oversold into support," suggesting that a dollar rally could be imminent, which would add pressure on both stocks and bonds. Given these dynamics, BTIG recommends a cautious approach to both equities and fixed-income investments in the near term.