SPX/ EQUITY BULL RUN: RISK-OFF SHIFT 10% LOWER ANY SECOND NOWSPX Bull run
1. Post Brexit US equities have been in an easing induced rally, with the Fed delaying hikes, BOE easing and RBNZ/ RBA also easing - this encouraged US risk markets to set new highs - with 7 of the last 9 weeks strong closes higher.
The Bull run over?
1. The last 2wks have closed flat but hhave remained rangey indicating the market has low conviction to break higher given the 7-bull weeks which saw 10pt+ increases, and we now look to have formed another price ceiling at 2188 0.5% up from the previous ceiling at 2188.
2. There is little reason for the bull run to continue, price action momentum is exhasted, the Fed is doing its best to be hawkish and the US election weighs ever nearer - not to mention US data e.g. GDP comes in lower indicating business conditions may not be the best domestically and easing in international markets looks to be all but fully priced with the FTSE now pulling back from its own hithw- so the move lower from here makes sense,
3. History on the markets side? historically Aug SPX has never closed below July and has been the traditional bull-run month, so my bet is that we will remain range bound for another 2-33wks (possibly one more 0.5% move higher) then the 10-15% pullback will begin in the first week of September as Traders square end of month profits in August end beginning the selling cascade, and the possible NFP beat steepens US rate hike expectations and the tightening puts further added downside pressure on the market.
Trading Strategy - Short SPX @2188; Short FTSE100 @>6900:
1. I like to be short SPX and FTSE from here with TP at 2075/2000 and 6440/6000.
2. Hedges include being long individual equities - i currently hold Apple longs from 105 and FB longs from 122.
Risksentiment
USDJPY/ SPX: NET RISK APPETITE - THE REVERSAL OR INTERDAY TREND?- As many of you know ive been tracking/ am keen on this whole macro "net risk sentiment" theme to gauge what direction markets are heading in for the day/ week/ several weeks.
- We started today as planned, with both safe havens and risk asset relatively flat, before risk-on sentiment dominated early trading with yen breaking out the 107 level and equity indexes holding their gains/ in the green.
- However, at apprx 10am GMT BBC Radio 4 reiterated the 3wk old sentiments from BOJ govenor Kuroda, which downplayed the chance of helicopter money/ took a hawkish tone - which in turn then shifted markets into a mildly strong risk-off rally, with yen falling 150pips straight down and equities failing to hold in the green.
Where do we go from here:
1. The easiest thought, with Yen up 1% and gold up 1% is to think "the risk rally/ recovery is materially over, we should start positioning for the material risk-off downtrend that has dominated 2016 and get net short safe havens again" however by steeping away from the fundamental intraday signs for a moment/ looking at the technicals from a macro perspective, there is a promising underlying trend that has developed this past 2wks (since the risk rally began) which MAY mean this is NOT the case.
2. Firstly look at the daily of USDJPY below (my favourite Safe haven indicator of risk sentiment given FX being the fastest asset to process information) and SPX above (my favourite risk-on indicator of risk sentiment due to its nobility) - what do you notice?
- For the past 9 trading days (since the risk-recovery started) SPX has traded one day higher, then one day lower EVERYDAY and today seems to be no exception - we are on the lower day. 9-days is particularly enough to be certain but it is definitely something worth thinking about when considering if this is the doom and gloom end of the risk rally or merely an interday correction that the market has been happy with since the rally started.
- Correlation at 97% confirms this view - and high correlations are usually markers of a trend (e.g. one up one down) and harder to break so i definitely think this could be an interday trend lower for risk (before resuming higher again tomorrow) - rather than a risk-off reversal.
BOJ Kuroda's reiterated comments:
1. Kurodas reiterated comments today from 3wks ago was certainly the driver for the aggressive sell-off however, we have since moved 50-70pips higher than them levels so there is definitely something more macro at play as to why risk is struggling today e.g. the one day trend that has held.
Going forward:
1. It will be interesting to see if that pattern continues to hold true e.g. tomorrow is a risk-on day. Though the odds are against it with friday historically being the WORST day for stocks due to end of week book clearing - so before making any moves on Friday it may be even best to wait until Monday to decide if the risk-off sentiment is here to stay before switching your trading sentiment (as i said last weekend) - unless we were to see some aggressive selling off tomorrow e.g. UJ to <104 - this to me would confirm that the risk rally was over and I would turn a net seller of USDJPY and cut my risk holdings
- It seems weird that the ECB dovishness was enough to send EUR$ lower (never happens) but not enough to give risk a prop up - so it could well be that the macro trend of 1 up/ 1 down on the daily takes precedent no matter what + the BBC R4 Spat with kurodas comments earlier was just an emphasiser of the already established marco pattern?
- Time will tell.