Break It or Make It – S&P 500 Is On The Edge

Stock investors are trying to figure out the markets next move as all three indexes just tumbled back below the June lows, it is not surprising that the CBOE Volatility Index, aka the VIX, has climbed to its highest levels since mid-June as well, trading to over 32 yesterday.

Are We Into Recession?

Bears will argue that if the US economy takes steps toward a more full-blown recession and investor sentiment turns even more bearish the S&P 500 could tumble to sub-3,000 levels, which is where the market was trading in October of 2019 a few months prior to the Covid outbreak.

The US dollar is creating a major headwind, and wage-growth looks difficult to slow. Meaning overall corporate profit margins could remain in the crosshairs for an extended period of time.

The Federal Reserve’s aggressive tightening program continues to fuel the US dollar rally while also pushing bond yields higher, two major pain points for stock bulls right now. A report from EPFR Global circulating shows that some +$30 billion flowed into cash last week alone, raising investors’ total cash pile to +$4.6 trillion.

There is another +$18 trillion sitting in bank accounts and +$150 billion in ultra-short bond funds. It’s likely that, return wise, money markets and bonds will only get more attractive as their rates climb in-step with the Fed’s benchmark rate, at least until investors believe the Fed is nearing the end of its rate hiking campaign.

The high degree of volatility and general uncertainty stands to continue boosting the appeal of these “safe havens” at the expense of money flowing into stocks. While that massive pile of cash will likely make its way back into stocks eventually many investors for now seem inclined to wait for more clear signs that the Fed is going to back off.

Many believe that a slowdown in the housing market could take a big bite out of overall inflation levels as shelter costs account for about a third of the Consumer Price Index (CPI). The pace of home price gains has slowed but outright declines have mostly been limited to regions that may have gotten a little overheated during the pandemic.

Keep in mind, while a more widespread decline in home prices might help pull down headline inflation eventually, there is also a risk that a major downturn could usher in a recession as consumers watch their home equity sink closer to zero.

Data to Watch

There is also always the risk of fallout spreading across other financial markets. The FHFA House Price Index, the Case-Shiller Home Price Index, and New Home Sales will all provide updates on the housing market today. Richmond Fed Manufacturing and Consumer Confidence are also due today.

On the earnings front, Advantest, Cintas, Concentrix, Jefferies Financial, Paychex, and Vail Resorts are all scheduled to report.

Riding a Sea of Green, Oil in Focus +G7 Makes it Official on Gold, Forex Focus on Sintra

Indeed, it was an epic bear market bounce, especially as doom and gloom prophecies have recession storm clouds billowing vertically with the horizon.

We calculate the lack of selling was enough to explain some of the bounce as there was minimal buy flow from retail or otherwise bankrolling this rotation rally.

On bonds, we think the street will wait until we are closer to the next CPI release to re-enter shorts as seasonal factors support the duration rally, so there might be more breathing room for stocks amid this fragile détente.

University of Michigan’s final release revised the 5-10y inflation expectation to 3.1% from 3.3%. And the 1y inflation expectation was adjusted to 5.3% from 5.4%.

On the surface, it suggests it was unreasonable for the Fed to decide on monetary policy with a backward-looking approach. With 5y5y breaks still in check, many now think it was unnecessary to hike 75bp based on one data survey. So, the softer Fed Funds curve on Friday was due to the more faded inflation reprint.

I would ignore it for a straightforward reason. Higher oil prices are inflation enemy number one for the Fed. And lower gasoline prices are at the top of the Biden administration’s election plan ahead of the November midterms. With the Fed focusing on the headline over core, US monetary policy is increasingly captive to oil prices. That observation implies higher volatility around the Fed’s reaction function. Hence with oil and gasoline prices staying high, the Fed will keep the rate hike pedal to the metal.

In addition, any hot data prints will provide room for higher repricing in front meetings, especially with a narrow window for the FED to sprint to the finish line and hit the end-of-year terminal rates target. In that view, the risk-reward for further front-loading of hikes is attractive.

We think the next multiple legs lower in the S & P 500 will come from a de-rating in earnings. Last week I suggested there was no need to risk a career mistake selling blocks of SPX 3700 at +30 VIX. Indeed, institutional sellers will need a lot more confidence that the earnings deterioration is happening now and that the consumer has stopped spending. Both go hand in hand; declining consumer spending does represent the main threat to earnings for big-ticket items – especially in the case of a recession.

And, of course, with the most significant pension month-end and quarter-end rebalancing buy estimate since March 2020 laying in wait, folks are less inclined to step in front of a month-end bounce.

Energy equities were under enormous pressure until Friday’s reversal, consistent with the broad drawdown across the commodity complex driven by growing recession and demand concerns. And that should remain a pressure point.

Hence, I suspect commodity markets will remain in focus, particularly oil, given the extent to which energy inflation fears have driven risk this year.

Oil Prices

Price action will soon tell us if the latest dive was a function of demand destruction or crowded positioning? But one thing is sure: the oil complex is not nearly as impervious as many had thought.

After getting hammered most of last week due to recession and fuel demand destruction concerns, oil prices rallied into the weekend on the back of physical demand. Those global economic worries were seemingly offset by higher China demand for “real world barrels.”

Indeed, energy demand in Northern, Central and Northwestern China hit record levels as millions turned on the AC to escape the oppressive heatwave, which likely created the Domino effect. Record-high electricity impacts not only fuel-intensive industry production but also oil prices.

There could have been some element of the tail (time spreads) wagging the dog(spot), but the curve in heavy backwardation for a while, but when word starts spreading that China is a premium for prompt barrels, it’s more than enough to spook shorts.

Although oil is a spot asset usually driven by supply and demand fundamentals, it is not unusual for the complex to trade like an anticipatory asset (stocks and forex) driven by the broader economic growth rate of demand, which is slowing if the PMI data are dependable.

Our view has been unwavering; in the absence of fresh supply, it will be challenging to see Brent trading below 100 as Ukraine -Russia war escalation will continue to drive energy price fears.

On the other hand, it is a fallacy to think Brent Crude l could stay +$120 given the amount of central bank-induced slowdown likely to be seen later in the year. The Fed and other inflation-fighting central banks want lower commodities, which is what they are explicitly trying to engineer.

Gold

G-7 countries will make it official that they have stopped buying Russian Gold. Since Russian Bars have been considered politically tainted in the West following the country’s invasion of Ukraine, I doubt making it official will have much impact on the gold market as it was assumed that Russia would keep domestic production at home to soak up surplus USD and prevent excessive appreciation of the Ruble. But there could be some headline bounce at the open.

Forex

G-10

Last week’s Eurozone PMIs added to a laundry list of reasons to be suspicious about chasing the Euro higher. From the Ukraine War to China’s lockdowns, economic activity looks bleak. At the same time, this would typically be enough to send the EURUSD shuffling towards parity on the back of a hawkish Fed. However, the street is conflicted with the ECB on the brink of a momentous policy pivot while setting the springboard to exit negative rates.

I do not think the street wanted to be short Euro ahead of this week’s Sintra meeting that could cement expectations for an impending exit from negative rates and possibly rolling out a functional anti-fragmentation “backstop.”

On another counter-trend trade, we still think the Yen offers attractive skew due to rising US recession risks and the prospect of a change in monetary policy in Japan itself. And with intervention rhetoric picking up, Tokyo could be guarded about buying dollars up here.

Asia FX

As usual, the Ringgit continues to be driven by external factors while underperforming the terms of trade improvement due to its high beta to CNH weakness, outflows from domestic investors, and exporters unwilling to convert USD due to the hawkish Fed.

However, with global risk sentiment improving and the Yuan rallying, we could see follow-through below 4.40 early in the week if US yields continue to trade soft.

Stocks Sniffing A Bear Market Rally

Summary & Key Takeaways

  • A number of key technical, sentiment and flow based indicators are suggesting we could see a relief in selling pressure over the coming weeks, and perhaps a countertrend rally in risk assets.
  • Reducing market hedges and short positions at current levels looks to be a prudent strategy.
  • However, the outlook for the growth, liquidity and profit cycles remains bearish and suggests investors and traders use any forthcoming strength to reinitiate hedges and downside optionality.

Ready For a Market Rally?

Following what has been a relentless few weeks for markets there are an increasing number of signs suggesting not only is it looking like the selling pressure may be subsiding for the stock market, but a much needed rally may ensue.

From a technical perspective, the S&P 500 looks to be testing the lower bound of its downtrend after bouncing off the new low of around 3,620. This 3,620 level is of note as it represents the JP Morgan put spread strike, thus being an area of significant short gamma exposure held by options dealers (the tail wags the stock market dog, remember). Given this position expires on 30 June, one would expect such a level to act as a “put wall” support over the coming weeks. The “put wall” is an estimate of the level in which dealers are most short gamma as their short put positions approach strike.

As these put positions approach their strikes, traders long those puts will begin to monetise and/or roll these positions forward, resulting in dealers buying back their short underlying positions that were used to delta hedge their short-put positions. As such, it is unlikely we see an accelerated move below 3,620 for the time being.

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Indeed, should the S&P 500 manage to rally up to the 3,900-4,100 area, this looks to be a constructive area to reinitiate hedges, particularly as this will likely coincide with resistance from the 50-day moving average.

Any move below 3,620 prior to the end of June would certainly nullify this thesis and likely usher in further selling as the put wall is breached, though I suspect we are in need of a catalyst to usher in further selling for now. With few significant data points set to be released over the next week two, such a catalyst may not arise for now.

In terms of the Nasdaq, it looks to have found similar support off the lower bound of its downtrend channel, and is looking like it wants to rally off this area. We saw similar rallies from such areas in late January, early March and in May.

Confirming this idea is the fact that the latest lows were accompanied by a positive divergence in RSI and OBV, indicative of waning momentum and selling pressure. These divergences are more pronounced on the Nasdaq than the S&P 500, and given the Nasdaq has very much led the market lower this year, one would suspect it to be in need of a greater countertrend rally.

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A test of the 50-day moving average or even the upper bound of the downtrend channel over the coming weeks is not out of the question. Bear market rallies can be swift and violent, especially when consensus is as short as it is presently.

Indeed, it is not just from a technical and momentum perspective that leads me to believe a rally may ensure, but a number of market internals are pointing to a similar outcome. If we compare the price action of some of the most economically sensitive sectors of the stock market, in this case Retail, Transports, Consumer Discretionary, Materials and Industrials, we can see these sub-sectors bar Materials have outperformed the broad market during this latest move lower, with materials stocks selling off in-line with commodities over the past week.

Generally, when the pro-cyclical parts of the market do not confirm the lower lows, it becomes difficult to see the market itself move significantly lower.

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Inversely, should the S&P 500 go on to rally and it not be confirmed by the outperformance from these pro-cyclical sectors, the probabilities suggest such a rally may be short lived.

In addition the economically sensitive sectors of the market not confirming the recent lows, we can see that the currency markets are too suggesting the same. Here we can see the FX Weathervane (per the unique work of Chris Carolan) has too diverged positively following the recent lows. We saw a similar divergence prior to both the March and May rallies, moves which saw the S&P 500 move 25% and 15% higher in short order.

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What’s more, both the VIX and the volatility term structure (presented below in a number of iterations) have also diverged bullishly following the recent lows. Bullish divergences in the VIX have historically been an excellent indicator of future price action, so too when comparing further dated implied volatility relative to one month out implied volatility. Volatility divergences are often signs of exhaustion and generally indicate some form of a relief rally may be due.

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The recent lows have also seen market breadth display some of its lowest readings in years. The percentage of stocks trading above their 50 day-moving averages recently hit near zero whilst the percentage of stocks trading above their 200-day moving averages saw a sub-20 reading, both reaching their lowest levels since March 2020. Likewise, the equal weighted S&P 500 index continues to outperform the market cap weighted S&P 500 index, generally a positive outcome for stocks, at least in the short-term.

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In terms of sentiment and positioning, both are at extremes and in need of a washout. Firstly, sentiment (here proxied by the SentimenTrader Optix index) has reached levels of extreme fear seen only sparingly over the past couple of decades. Whilst such extreme readings don’t imply a sustainable market bottom is present, we do generally see the market rally over the short-term from such levels with. Refer the price action relative to sentiment during the GFC for context.

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Clearly, everyone is bearish, and with bearish sentiment comes bearish positioning. Indeed, small trader put buying has reached near record highs.

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Whilst small speculator positioning in the futures market for index equities (aggregating S&P 500, Nasdaq 100 and DIJA index futures) is extremely short. Remember, small traders (i.e. retail) tend to get their timing fairly wrong; buying at the highs and selling at the lows. It is increasingly looking like the markets need to rally to wash out this bearishness before the correction can continue.

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This is certainly an outcome the “smart money” is betting on, as commercial hedgers have on near max long positions. Similar positioning setups in recent years have again generally seen the market move higher in the short-term.

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When we consider these dynamics in the context of what is a favourable period of seasonality through July (and yes, seasonality does matter), a relief rally over the coming weeks looks like a significant possibility.

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Another important consideration supporting this thesis are the quarter-end rebalancing flows set to hit markets as we close out the month. With broad equity indexes down roughly 6-8% versus bonds this quarter, expect rebalancing flows from target date funds, pension funds and traditional 60/40 portfolios to come into equities as these systematic strategies rebalance their books. This is a very real phenomenon and an important dynamic traders should consider, with the great Mike Green estimating such flows into stocks to be in the order of around $85b.

Owning downside protection from here remains a sound strategy, however, from a more tactical nature, the risk-to-reward for short-term hedges and outright shorts appear to be less appealing for now. Medium-term, given the forward outlook for the growth cycle, liquidity cycle and profit cycle, I continue to believe that strength should be sold.

For now, it looks to be an optimal time to reduce broad short positions and equity market hedges, with a view of reapplying these should a rally eventuate. It has been a profitable couple of months for bears and now appears an opportune time to reduce bearish exposure. Bear market rallies can be swift, vicious and extreme.

Bond Markets

In other markets, I continue to be ever intrigued by the bond market as the ultimate contrarian trade. Betting against both stocks and bonds has been a sound strategy of late, and, whilst I ultimately believe stocks could head much lower from here, I do see the bull case for a substantial move higher in bonds.

A number of signs are indeed suggesting bonds are looking ripe for reversal. Firstly, the latest move higher in yields on the back of recent higher than expected inflation prints is beginning to look like an exhausted trend. The 30-year Treasury yield has run into important overhead resistance at around 3.4% on waning momentum (as measured here via the RSI and price versus the 200-day moving average), all the while triggering a weekly 9-13 DeMark sell signal.

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Given how far price has deviated from the long-term moving averages, a move back down to around the 2.4% level of support for the 30-year Treasury yield seems plausible at the very least, especially when considering the growth cycle outlook and ever increasing recession risk. Bonds will eventually price this in.

Market internals are now very much signalling rates lower and bonds higher, illustrated here via the trusty copper/gold ratio. The current divergence looks strikingly similar to what occurred in late 2018 as yields peaked around a similar level.

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Seasonality too is very support of the long bond over the coming months.

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Could it be that bonds are now undervalued? I suspect this is unlikely given how inflation is likely to not materially move lower until at least the early stages of 2023 on a rate-of-change basis. For bonds to rally, we likely need a continued sell-off in commodities, a Fed pivot, or a material deceleration in economic data (which we are begging to see). The bond trade is not be here yet, but it may be on its way.

European Equities: A Week in Review – 03/06/22

The Majors

It was a bearish week for the European majors in the week ending June 3, 2022.

The EuroStoxx600 fell by 0.87%, with the CAC40 and the DAX seeing losses of 0.47% and 0.01%, respectively.

A pickup in inflationary pressure and disappointing private sector PMI figures weighed on the European majors. The pickup in inflationary pressure supported the ECB’s planned shift in monetary policy.

From the US, hawkish FOMC member chatter and nonfarm payrolls added pressure, with the pickup in hiring supporting a more aggressive Fed interest rate path trajectory.

Economic data from China reflected the impact of the prolonged COVID-19 lockdown measures on the economy.

The services and manufacturing sectors continued to contract, albeit at a slower pace. In May, the NBS manufacturing PMI increased from 47.4 to 49.6, with the services PMI up from 41.9 to 47.8.

The all-important Caixin manufacturing PMI rose from 46.0 to 48.1.

The Stats

It was a particularly busy week on the Eurozone economic calendar.

Key stats included private sector PMI and inflation figures for member states and the Eurozone.

A pickup in inflationary pressure, according to prelim figures for May, pressured the majors.

The Eurozone’s annual rate of inflation accelerated from 7.4% to 8.1%.

Private sector PMIs disappointed, however.

In May, the Eurozone’s manufacturing PMI fell from 55.5 to 54.6, with the services PMI down from 57.7 to 56.1. As a result, the composite PMI slipped from 55.8 to 54.9.

On the monetary policy front, bets of a move away from negative rates also tested support.

From the US

In the first half of the week, consumer confidence and manufacturing PMI numbers delivered Dollar support.

The CB Consumer Confidence Index fell from 108.6 to 106.4, while the ISM Manufacturing PMI rose from 55.4 to 56.1. Economists forecast the CB Consumer Confidence Index to fall to 103.9.

On Thursday, ADP nonfarm employment change figures disappointed ahead of the all-important NFP numbers on Friday.

Nonfarm payrolls increased by 390k in May, following a 436k jump in April. Despite the increase, the unemployment rate held steady at 3.6% due to a pickup in the participation rate from 62.2% to 62.3%.

The Market Movers

From the DAX, it was a bullish week for the auto sector. BMW and Volkswagen rose by 2.67% and by 2.92%, respectively. Continental and Daimler saw gains of 1.53% and 2.01%, respectively.

It was a mixed week for the banking sector. Deutsche Bank fell by 1.85%, while Commerzbank rose by 0.99%.

From the CAC, it was also a mixed week for the French banks. Soc Gen gained 0.40%, while Credit Agricole slid by 11.20%. BNP Paribas ended the week down by 1.85%.

The French auto sector had a mixed week. Stellantis NV slipped by 0.03%, while Renault rose by 2.34%.

Air France-KLM slid by 4.74%, with Airbus ending the week down 2.84%.

On the VIX Index

In the week ending June 3, the VIX fell for a fourth week in five.

Following a 12.61% loss from the previous week, the VIX fell by 3.62% to end the week at 24.79.

2-days in the red from 4 sessions, which included a 1.91% decline on Wednesday did the damage.

For the week, the S&P500 fell by 1.20%, with the Dow and the NASDAQ seeing losses of 0.94% and 1.20%, respectively.

VIX
VIX 030622 Weekly Chart

The Week Ahead

It is another busy week on the Eurozone economic calendar.

German factory orders and industrial production figures will draw market interest on Tuesday and Wednesday.

The markets will also look for any revisions to Eurozone GDP numbers on Wednesday ahead of the ECB interest rate decision on Thursday.

With the markets expecting the ECB to leave rates unchanged, the focus will be on ECB President Christine Lagarde and the press conference.

From the US, jobless claims and inflation figures for May will draw plenty of interest. Another spike in inflation would test support for riskier assets.

Economic data from China will also influence. Trade and inflation numbers are due out on Thursday and Friday.

European Equities: A Week in Review – 20/05/22

The Majors

It was a bearish week for the European majors in the week ending May 20, 2022.

The CAC40 slid by 1.22%, with the EuroStoxx600 and the DAX seeing losses of 0.55% and 0.33%, respectively.

A bullish end to the week was not enough for the major bourses, with sentiment towards monetary policy and recession fears leaving the majors in the red.

Economic data from China set a bearish tone from the start of the week, as lockdown measures took their toll.

Rising inflationary pressures, the ongoing war in Ukraine, and a shift in sentiment towards Fed and ECB monetary policy did the damage.

The Stats

Early in the week, trade data and GDP numbers delivered mixed results.

In March, the Eurozone’s trade deficit widened from €7.6bn to €16.4bn, with the war in Ukraine continuing to hit crude oil prices.

Second estimate GDP numbers for the Eurozone were market positive, however. In Q1, the economy grew by 0.3%, up from a first estimate of 0.2%. Year on year, the economy expanded by 5.1%, up from a first estimate of 5.0%.

Finalized inflation figures for the Eurozone had a muted impact mid-week, with the annual rate of inflation easing from 7.5% to 7.4%.

At the end of the week, however, German producer prices for industrial goods surged by 33.5% compared with April 2021, the highest increase on record.

From the EU, downward revisions to economic forecasts weighed on the European equity markets.

For 2022, the European Commission forecasts growth of 2.7% and 2.3% for 2023. While the Commission revised both downwards, the 2022 revision was most marked.

In February, the European Commission forecast growth of 4.0% for 2022 and 2.7% for 2023.

From the ECB, the monetary policy meeting minutes provided few surprises, with the talk of summer rate hikes in line with market expectations.

From the US

Early in the week, retail sales and industrial production figures eased fears of an economic meltdown.

In April, retail sales jumped 2.5%, with industrial production rising by 1.1%.

On Thursday, jobless claims and Philly Fed Manufacturing numbers disappointed, however.

Initial jobless claims rose from 197k to 218k, in the week ending May 13, with the Philly Fed Manufacturing Index falling from 17.6 to 2.6 in May.

While the stats were mixed, Fed Chair Powell tested investor sentiment on Tuesday.

After providing the markets with assurances about larger rate hikes in the week prior, the Fed Chair talked of a willingness to move policy beyond neutral to curb inflation. Powell also discussed some possible pain ahead for the labor market while acknowledging that the Fed should have lifted rates sooner.

The Market Movers

From the DAX, it was a mixed week for the auto sector. Volkswagen and Continental rose by 1.03% and by 0.51%, respectively, while Daimler and BMW saw losses of 1.25% and 0.27%, respectively.

It was a bullish week for the banking sector. Deutsche Bank rose by 0.16%. with Commerzbank ending the week up by 12.60%.

From the CAC, it was also a bullish week for the French banks. Soc Gen rallied by 4.97%, with Credit Agricole and BNP Paribas rising by 0.97% and 2.54%, respectively.

The French auto sector had a mixed week. Stellantis NV slid by 4.97%, while Renault rose by 2.42%.

Air France-KLM jumped by 10.52%, with Airbus ending the week up 0.53%.

On the VIX Index

In the week ending May-20, the VIX ended a two-week losing streak to mark a fifth weekly rise in 7-weeks.

Partially reversing a 4.37% decline from the previous week, the VIX rose by 1.94% to end the week at 29.43.

2-days in the green from 5 sessions, which included an 18.62% jump on Wednesday, delivered the upside.

For the week, the NASDAQ slid by 3.82%, with the Dow and the S&P500 seeing losses of 2.90% and 3.05%, respectively.

VIX 200522 Weekly Chart

The Week Ahead

It is a busier week ahead on the Eurozone economic calendar.

On Monday, Germany’s Ifo business climate index will draw interest ahead of private sector PMI numbers on Tuesday.

While the markets may forgive a weaker business climate index, weak manufacturing PMIs will test support for the majors.

On Wednesday, the German economy will be back in focus with GDP and consumer sentiment to wrap up the week.

From the US, prelim private sector PMIs for May kick things off. With the markets fretting over the risk of a recession, expect the services PMI to be the key.

On Wednesday, core durable goods orders will draw interest ahead of GDP and jobless claims figures on Thursday.

At the end of the week, core PCE price index and personal spending figures will also have a material impact on market risk sentiment.

From the Fed, the FOMC meeting minutes should provide few surprises following recent Fed Chair Powell speeches.

Away from the economic calendar, updates from China on lockdown measures and stimulus and the war in Ukraine will also influence.

European Equities: A Week in Review – 13/05/22

The Majors

It was a bullish week for the European majors in the week ending May-13, 2022.

The DAX rallied by 2.59%, with the EuroStoxx600 and the CAC40 seeing gains of 0.83% and 1.67%, respectively. A Friday Fed Chair Powell induced rally pulled the CAC40 and the EuroStoxx600 into positive territory for the week.

A quiet economic calendar left the markets to consider the impact of persistent inflationary pressure, China’s lockdown measures, and the war in Ukraine on the economic outlook.

While US inflationary pressures softened in April, fears of a global recession spiked in the week. Adding to the market angst were concerns about a more aggressive Fed rate path to policy normalization.

The negative sentiment hit the global financial markets, with the European majors unable to avoid the fallout.

With the war in Ukraine showing no signs of ending and China grappling with the latest COVID-19 breakout, conditions could worsen.

Amidst recession fears, Fed Chair Powell delivered much-needed market support on Friday, however. The Fed Chair assured the markets that larger rate hikes remained off the table despite the latest US inflation numbers. For the DAX, it was the first weekly rise in six weeks.

The Stats

ZEW Economic Sentiment figures for Germany and the Eurozone and Eurozone industrial production figures were the key stats.

In May, economic sentiment improved, with Germany’s ZEW Economic Sentiment Index up from -41.0 to -34.3. The Eurozone’s ZEW Economic Sentiment Index climbed from -43.0 to -29.5.

At the end of the week, industrial production disappointed, however.

In March, industrial production fell by 1.8%. Production rose by a modest 0.5% in February.

From the US

Inflation was back in focus, which caused market turbulence mid-week.

In April, the annual rate of inflation softened from 8.5% to 8.3% versus a forecasted 8.1%. The core annual rate of inflation softened from 6.5% to 6.2%. While softer, inflation was stronger than anticipated, supporting the more hawkish sentiment towards Fed monetary policy.

On Thursday, wholesale inflation also drew attention. In the month of April, the core producer price index increased by 0.4% after a 1.2% rise in March.

Initial jobless claims had a muted impact despite a rise from 202k to 203k in the week ending May-06.

On the monetary policy front, Fed Chair Powell calmed the markets on Friday, assuring that larger rate hikes would remain off the table.

The Market Movers

From the DAX, it was a mixed week for the auto sector. Continental rallied by 8.22%, with Daimler gaining 3.25%. BMW and Volkswagen saw losses of 1.77% and 1.14%, respectively.

It was a bullish week for the banking sector. Deutsche Bank rose by 0.34%. with Commerzbank ending the week up by 5.07%.

From the CAC, it was also a bullish week for the French banks. BNP Paribas rallied by 3.54%, with Credit Agricole and Soc Gen rising by 3.21% and 3.41%, respectively.

The French auto sector had a bullish week. Stellantis NV rallied by 4.88%, with Renault up 1.86%.

Air France-KLM fell by 1.62%, with Airbus ending the week down 1.06%.

On the VIX Index

In the week ending May-13, the VIX fell for a second consecutive week. The VIX had risen for four consecutive weeks ahead of the current downtrend.

Following a 9.61% decline from the previous week, the VIX fell by 4.37% to end the week at 28.87.

4-days in the red from 5 sessions, which included a 9.13% slide on Friday, delivered the downside.

For the week, the NASDAQ slid by 2.80%, with the Dow and the S&P500 seeing losses of 2.14% and 2.41%, respectively.

VIX 130522 Weekly Chart

The Week Ahead

It is a quiet week ahead on the Eurozone economic calendar.

Eurozone trade, GDP, and inflation figures are due out. Expect any revisions from the first estimate GDP and any upward revisions to prelim inflation figures to draw interest.

It is a busy week ahead on the US economic calendar.

On Tuesday, retail sales figures will be key ahead of jobless claims and Philly Fed Manufacturing Index numbers on Thursday.

While stats from the Eurozone and the US will influence, economic data and news updates from China will also need considering.

On Monday, industrial production figures for April set the tone. The markets will be looking out for updates on new lockdown measures.

Away from the economic calendar, updates on the war in Ukraine and crude oil prices will also influence.

European Equities: A Week in Review – 06/05/22

The Majors

It was a bearish week for the European majors in the week ending May-06, 2022.

The DAX fell by 3.00%, with the EuroStoxx600 and the CAC40 seeing losses of 4.55% and 4.21%, respectively.

Disappointing economic data coupled with market angst over inflation and Fed monetary policy left the majors deep in the red.

The global financial markets brushed aside Fed Chair Powell’s attempts to ease concerns of more aggressive policy moves. Lockdown measures in China and the ongoing war in Ukraine continue to disrupt supply chains, pushing oil prices northwards.

The upward trend in crude oil prices and supply chain woes were market negative.

The Stats

The German economy and private sector PMIs were the areas of focus.

It was a mixed set of numbers, with economic data from Germany disappointing.

In March, German retail sales unexpectedly fell by 0.1% versus a forecasted 0.3% increase. Unemployment also fell more slowly, leaving the German unemployment rate at 5.0%.

Trade, factory orders, and industrial production figures also sounded the alarm bells.

Germany’s trade surplus narrowed from €11.1bn to €3.2bn, with factory orders tumbling by 4.7%.

Industrial production was not much better, sliding by 3.9%, to reflect the impact of the war in Ukraine and lockdown measures in China.

Private sector PMIs were also negative, with the Eurozone’s manufacturing PMI falling to a 15-month low of 55.5. Easing lockdown measures provided some relief, with the Eurozone services PMI rising from 55.6 to 57.7 in April.

From the US

Private sector PMIs were the key stats in the week ahead of nonfarm payroll numbers on Friday.

The numbers were mixed, with private sector PMI figures disappointing.

In April, the ISM Manufacturing PMI fell from 57.1 to 55.4, with the Non-Manufacturing PMI down from 58.3 to 57.1.

Labor market numbers were also dollar negative ahead of the NFP numbers. The ADP reported a 247k increase in nonfarm payrolls for April, falling short of forecasts, and a 479k rise in March.

For the week ending April 29, initial jobless claims increased from 181k to 200k.

On Friday, the stats were market neutral. Nonfarm payrolls increased by 428k in April, following a 428k rise in March. As a result, the US unemployment rate held steady at 3.6%.

While the stats were of interest, the Fed monetary policy decision and forward guidance were the key drivers in the week.

On Wednesday, the Fed delivered a 50 basis point rate hike, which was in line with forecasts. Fed Chair Powell also looked to calm the markets by assuring that 75 basis point hikes would not be on the table.

Relief was brief, with jitters over inflation and Fed policy returning in the second half of the week.

The Market Movers

From the DAX, it was a mixed week for the auto sector. Daimler and Continental tumbled by 7.48% and 7.12%, respectively, with Volkswagen falling by 2.00%. BMW bucked the trend with a 0.70% gain.

It was a bearish week for the banking sector. Deutsche Bank and Commerzbank saw losses of 3.23% and 2.55%, respectively.

From the CAC, it was a mixed week for the banks. BNP Paribas rose by 1.77%, while Credit Agricole and Soc Gen ended the week down by 3.95% and 2.59%, respectively.

It was another mixed week for the French auto sector. Stellantis NV rose by 1.25%, while Renault fell by 1.74%.

Air France-KLM slipped by 0.08%, while Airbus ended the week up 1.86%.

On the VIX Index

A run of four consecutive weeks in the green came to an end for the VIX in the week ending May-06.

Partially reversing an 18.40% jump from the previous week, the VIX fell by 9.61% to end the week at 30.19.

4-days in the red from 5 sessions, which included a 13.09% slide on Wednesday, delivered the downside.

For the week, the NASDAQ fell by 1.54%, with the Dow and the S&P500 seeing losses of 0.24% and 0.21%, respectively.

VIX 060522 Weekly Chart

The Week Ahead

It is a busy week ahead on the Eurozone economic calendar.

ZEW Economic Sentiment figures for Germany and the Eurozone are due on Tuesday.

On Friday, Eurozone industrial production numbers will also influence.

Other stats in the week include finalized member state inflation figures for May that should have a muted impact on the majors.

From the US, inflation is back in the spotlight, with consumer and wholesale inflation figures due out on Wednesday and Thursday.

Another spike in inflation would test support for riskier assets following Fed forward guidance last week.

On Thursday, initial jobless claims will also draw interest ahead of consumer sentiment figures on Friday.

Economic data and updates on lockdown measures from China will also provide direction. Key stats include trade data and inflation figures.

While the stats will influence, news updates on the war in Ukraine and central bank chatter will also need monitoring.

European Equities: A Week in Review – 29/04/22

The Majors

It was a bearish week for the European majors in the week ending April-29, 2022.

The CAC40 fell by 0.73%, with the EuroStoxx600 and the DAX seeing losses of 0.64% and 0.31%, respectively.

After a bearish start to the week, corporate earnings supported riskier assets in the week. The upside was modest, however, with market sentiment towards the global economy and Fed monetary policy weighing heavily on risk sentiment.

On Friday, the Financial Times reported China’s politburo “promising to strengthen macro adjustments and achieve full-year economic and social development goals.”

China’s pledge to support the economy also delivered the European majors with support.

While the weekly losses were modest, it was a bearish month, with the DAX sliding by 2.20% and the CAC and EuroStoxx600 falling by 1.90% and 1.20%, respectively.

China’s COVID-19 lockdown measures and the ongoing war in Ukraine raised further concerns over supply chain disruption. Fed Chair Powell’s talk of aggressive policy moves to curb inflation and jitters over the threat of a recession were also market negative in the month.

The Stats

Early in the week, German business and consumer sentiment diverged. While business sentiment improved, consumer sentiment weakened further.

The Ifo Business Climate Index increased from 90.8 to 91.8 in April, while the Gfk German Consumer Climate Index fell from -15.7 to -26.5.

In the second half of the week, the market focus shifted to inflation and economic growth.

The stats were market positive, with German and the Eurozone GDP numbers for the first quarter providing support.

In Q1 2022, the German economy expanded by 4.0% year on year, up from 1.8% in the previous quarter.

The Eurozone’s economy grew by 5.0% year on year, up from 4.6% in the quarter prior.

On the inflation front, inflationary pressures ticked up further, though only moderately. According to prelim figures, the Eurozone’s annual rate of inflation picked up from 7.4% to 7.5%.

From the US

Core durable goods orders and consumer sentiment drew interest on Tuesday. The stats were market positive, with core durable goods orders rising by 1.1% in March.

Consumer sentiment held steady in April, which was also market positive. The CB Consumer Confidence Index slipped from 107.6 to 107.3.

On Thursday, US GDP numbers disappointed, however, with the US economy contracting by 1.4%. In the previous quarter, the economy expanded by 6.9%.

At the end of the week, inflation and personal spending were market positive. Personal spending rose by 1.1% in March, while inflationary pressures softened. In March, the Core PCE Price Index increased by 5.2% year on year, down from 5.3% in February.

The Market Movers

From the DAX, it was a mixed week for the auto sector. Daimler rallied by 3.66%, with Continental gaining 0.64%. Volkswagen slid by 2.43%, however, with BMW ending the week flat.

It was a bearish week for the banking sector. Deutsche Bank tumbled by 12.68%, with Commerzbank sliding by 7.65%.

From the CAC, it was a bearish week for the banks. BNP Paribas and Soc Gen saw losses of 3.90% and 3.66%, respectively, with Credit Agricole falling by 1.05%.

It was another mixed week for the French auto sector. Stellantis NV slipped by 0.37%, while Renault ended the week up 1.59%.

Air France-KLM slid by 4.24%, while Airbus ended the week with a 0.84% gain.

On the VIX Index

It was a fourth consecutive week in the green for the VIX in the week ending April-29.

Following a 24.27% surge from the previous week, the VIX jumped by 18.40% to end the week at 33.40.

2-days in the green from 5 sessions, which included a 24.06% surge on Tuesday and an 11.37% jump on Friday, delivered the upside.

In the week, the NASDAQ slumped by 3.93%, with the Dow and the S&P500 sliding by 2.47% and 3.27%, respectively.

VIX 290422 Weekly Chart

The Week Ahead

It is a busy week ahead on the Eurozone economic calendar.

On Monday, manufacturing PMIs and German retail sales will draw interest ahead of German unemployment figures on Tuesday.

On Wednesday, the market attention will shift to service sector PMIs, German trade data, and Eurozone retail sales.

Over the remainder of the week, the German economy will remain in the spotlight. On Thursday, German factory orders are due out ahead of industrial production figures on Friday.

From the US, it is a big week ahead. On the economic data front, ISM survey PMIs will influence this Monday and Wednesday, with Wednesday’s ISM Non-Manufacturing PMI the main driver.

The US labor market will also be in focus, with the ADP nonfarm employment change figures and official nonfarm numbers due out on Wednesday and Friday.

The main event of the week, however, is the FED’s monetary policy decision. A larger than expected rate hike will spook the markets.

Away from the economic calendar, corporate earnings will continue to provide direction. The majors could be in for a tough time following Amazon.com’s earnings after the European close on Friday.

News updates on the war in Ukraine will also need monitoring throughout the week.

Combing Through Data – Looking For Clues About Volatility, USD & Stocks

We are now seeing that major economies (US/UK/Japan) are not immune from global deleveraging and inflation. As investors seek safety in the US Dollar this may eventually trigger a broader and deeper selloff in U.S. stocks and market volatility will begin to pick up as the VIXY moves up. As the USD continues to strengthen corporate profits for US multinationals will begin to disappear.

Especially in times like these, traders must understand where opportunities are and how to turn this knowledge into profits. Part of what we do at www.TheTechnicalTraders.com is to distill price action into technical strategies and modeling systems. These assist us in understanding when opportunities exist in the US stock market and specific sector ETFs. Our core objective is to protect capital while identifying suitable opportunities for profits in trends.

Volatility May Have Bottomed Setting the Stage for a Trend Higher

Volatility is beginning to pick up as we see the VIXY moving up strongly from its 6-month base.

Utilizing multiple time frame analysis and then focusing on the 4-hour chart we were able to capture the volatility low earlier than we would have by only using the daily, weekly, or monthly chart.

VIXY – ProShares Trust VIX Short-Term Futures ETF: 4-Hour

Volatility VIXY chart

The USD Is Up Vs All Other Major Currencies

The US Dollar is continuing to appreciate as investors and central banks seek safety from geopolitical, inflation, and other market dislocations. The low in the USD was made on January 6, 2021.

1 Year Relative Performance (USD) – finviz.com

USD relative performance chart

UUP – Invesco DB USD Index Bullish Fund ETF: Daily

USD Index chart

Stocks Meet Resistance and Are Slipping Again!

Stocks hit resistance the first week of 2022 after hitting a Fibonacci iteration of 2.1618. Less than two months later the SPY found support at yet another Fibonacci number of 1.618. These Fibonacci levels are based on the range calculation of the pre-Covid high and the Covid March 2020 low.

However, after rallying from the 1.618 level the SPY rolled over to the downside as it hit a 72-bar (12-day) Bollinger Band using a standard deviation setting of 1.618.

Now we will watch closely to see if the price will make a new low for 2022 which may confirm a shift in the overall trend in stocks.

SPY – SPDR S&P 500 ETF Trust: 4-Hour

SPY trending chart

Inverse ETFs Offer an Alternative to Traditional Buy and Hold

Astute traders who want to do more than liquidate part or all their stock holdings may want to consider investing in an inverted ETF. Inverted ETFs provide the ability to take advantage of a downturn in the stock market without the complexities of having to sell individual stocks short.

If our goal as a trader is to make money, we need to adapt and be as agile as necessary. This is one of the reasons why our team continually tracks global money flow according to each country’s stock index but additionally other types of markets and asset classes. Our quantitative trading research is crucial in determining which markets to trade and how to efficiently employ trading capital.

Since we reviewed the SPY uptrend and the potential for a change of trend to the downside; it’s only appropriate to view the opposite side of this trade by looking at the SH inverted ETF.

SH – Proshares Short S&P 500 ETF: 4-Hour

SH inverted ETF chart

Understanding Price Is a Game-changer

As technical traders, we follow price only, and when a new trend has been confirmed, we change our positions accordingly. We provide our ETF trades to subscribers. Recently, we entered new trades, all of which hit their first profit target levels and then eventually triggered their break-even profit stop loss orders on their remaining position.

After booking our profits we are now safely in cash preparing for our next trades. Our models continually track price action in a multitude of markets and asset classes as we track global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Where Are Investors Putting Their Money -Now Vs. Then?

A way to determine this is to simply plot the indices and then see how they stack up against each other. Price data should also be viewed and analyzed in a multi-timeframe environment: short-term, medium-term, and long-term.

As a trader or investor, we know it’s important to determine if a market is in a bull, bear, accumulation, or distribution phase. Additionally, we want to know how the market we’re trading is performing compared to its peers.

The following charts provide snapshots of how the SPY ETF (US S&P 500) is doing compared to the other US and global stock indices.

The year-to-date chart is showing us a maximum volatility spread of 15.73%. This is simply the difference between the highest stock index, Australia 200 +1.18% vs the lowest stock index US Nasdaq 100 -14.55%. Australia’s market has recently done well due to its strong energy and commodity interests which in turn has contributed to the strengthening Australian dollar.

SPY Year-to-date Daily: Max Volatility 15.73%

max volatility

TheTechnicalTraders – TradingView

The volatility spread at first doesn’t seem that significant but over time it can be substantial. This is one of the reasons why our team continually tracks global money flow according to each country’s stock index but additionally other types of markets and asset classes. Our quantitative trading research is crucial in determining which markets to trade and how to efficiently employ trading capital.

This maximum volatility spread during 2021-2022 is 44.42%. The highest stock index, India 50 +23.75% vs the lowest stock index Hong Kong 33 -20.67%. The Hong Kong and China stock markets have been plagued with numerous Covid issues in 2020, 2021, and now recently again in 2022.

SPY 2021-2022 Daily: Max Volatility 44.42%

max volatility

TheTechnicalTraders – TradingView

Now we can take a longer-term view of the past 2+ years covering Covid before and after. We notice that the Nasdaq 100 is the overall leader despite its recent negative performance in 2022.

This maximum volatility for 2020-2022 is 89.70%. The highest stock index, US Nasdaq 100 +69.70% vs the lowest stock index Hong Kong 33 -20.00%.

SPY 2020-2022 Daily: Max Volatility 89.70%

max volatility

TheTechnicalTraders.com – TradingView

Knowledge, Wisdom, and Application Are Needed

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly.

We provide our ETF trades to our subscribers, and in the last six trades we entered in March, all have now been closed at a profit! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens, but that is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there and how can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

European Equities: A Week in Review – 15/04/22

The Majors

It was a mixed week for the European majors in the week ending April-15, 2022.

The CAC40 rose by 0.63%, while the DAX and the EuroStoxx600 saw losses of 0.84% and 0.25%, respectively.

A marked shift in central bank monetary policy and forward guidance, coupled with intensifying supply chain disruption weighed on riskier assets.

With U.S inflation hitting a 4 decade high and the war in Ukraine showing no signs of ending, fears of a continued rise in commodities, factory gate prices, and consumer prices were market negative.

An extended war in Ukraine would force central banks to take more aggressive measures to curb inflation, which could adversely affect the global economy.

The Stats

It was a quieter week, with the markets focused on economic sentiment and ECB monetary policy.

Economic sentiment figures for Germany and the Eurozone weakened further. In April, Germany’s ZEW Economic Sentiment Index slipped from -39.3 to -41.0, with the Eurozone’s falling from -38.7 to -43.0.

While inflation expectations softened, limiting the damage, fears of stagflation and the war in Ukraine weighed on sentiment.

Other stats in the week included finalized inflation figures for member states that had a muted impact on the EUR and European bourses.

On the monetary policy front, the ECB left the deposit and cash rates unchanged on Thursday. For the European majors, the more cautious stance was market positive.

Unlike other central banks, the ECB left interest rates unchanged and talked of downside risks to the economy stemming from the war in Ukraine.

From the U.S

At the start of the week, inflation was back in focus, with the U.S annual rate of inflation accelerating from 7.9% to 8.5%. In March, the core annual rate of inflation picked up from 6.4% to 6.5%.

On Thursday, the market focus shifted to retail sales, jobless claims, and consumer sentiment.

In March, retail sales increased by 0.5%, with core retail sales rising by 1.10%. Economists had forecast increases of 0.6% and 1.0%, respectively.

Jobless claims held below the 200k level. In the week ending April-08, jobless claims increased from 167k to 185k.

While of less influence, consumer sentiment also drew interest amidst the shift in FED policy forced by the surge in consumer prices.

In April, the Michigan Consumer Sentiment Index jumped from 59.4 to 65.7.

The Market Movers

From the DAX, it was a bearish week for the auto sector. Volkswagen and Continental slid by 2.65% and 1.61%, respectively, with BMW falling by 0.99%. Daimler ended the week with a modest 0.16% gain.

It was a mixed week for the banking sector. Deutsche Bank tumbled by 7.33%, with Commerzbank falling by 6.91%.

From the CAC, it was a bullish week for the banks. Soc Gen rallied by 4.57%, with Credit Agricole and BNP Paribas rising by 0.91% and 3.47%, respectively.

Things were also bullish for the French auto sector. Stellantis NV and Renault ended the week up 1.28% and 1.74%, respectively.

Air France-KLM and Airbus saw gains of 3.63% and 2.63%, respectively.

On the VIX Index

It was a second consecutive week in the green for the VIX in the week ending April-15.

Following a 7.79% gain from the previous week, the VIX rose by 7.28% to end the week at 22.70.

2-days in the green from 4 sessions, which included a 15.2% jump on Monday, delivered the upside.

In the week, the Dow fell by 0.78%, with the NASDAQ and the S&P500 sliding by 2.63% and 2.13%, respectively.

VIX 150422 Weekly Chart

The Week Ahead

It is another busy week ahead on the Eurozone economic calendar.

Mid-week, Eurozone trade, and industrial production figures will draw interest ahead of finalized inflation figures on Thursday.

On Friday, prelim private sector PMIs for France, Germany, and the Eurozone will be the key stats of the week.

From the U.S, jobless claims and private sector PMIs will also influence.

Economic data from China will set the tone on Monday, with GDP and industrial production figures in focus.

While the stats will provide direction, news updates on the war in Ukraine will remain the key driver along with central bank chatter.

European Equities: A Week in Review – 01/04/22

The Majors

It was a bullish week for the European majors in the week ending April-1, 2022.

The CAC40 rose by 1.99%, with the EuroStoxx600 and the DAX ending the week with gains of 1.06% and 0.98%, respectively.

It was a choppy week for the European majors. Through the first half of the week, hopes of an end to the Russian invasion of Ukraine drove demand for riskier assets.

Failure to agree to end the invasion led to a partial retracement through the second half of the week.

Economic data took a back seat once more, with disappointing manufacturing sector PMIs having limited impact. A downward trend in crude oil prices was positive amidst concerns over inflation.

The Stats

Mid-week, the German economy was in the spotlight. While the stats were skewed to the negative, the impact on the European majors was modest. With Russia’s invasion of Ukraine ongoing, investors anticipate a near-term impact on economic activity.

In April, Germany’s GfK Consumer Climate Indicator fell from -8.5 to -15.5, with retail sales rising by just 0.3% in February.

Unemployment numbers were also underwhelming, with an 18k fall in unemployment leaving the unemployment rate at 5.0%.

On Friday, manufacturing sector PMI numbers for March also failed to impress.

In March, Spain’s manufacturing PMI fell from 56.9 to 54.2, with Italy’s PMI declining from 58.3 to 55.8. Economists had forecast PMIs of 55.5 and 57.0, respectively.

The French manufacturing PMI fell from 57.2 to 54.7, down from a prelim of 54.8. Germany’s PMI declined from 58.4 to 56.9, down from a prelim 57.6.

For the Eurozone, the manufacturing PMI fell from 58.2 to a 14-month low of 56.6, down from a prelim 57.0.

Other stats in the week included finalized inflation figures for member states and the Eurozone and French consumer spending figures. These stats drew little interest, with Germany’s economy and survey-based data in focus.

From the U.S

It was a busier week on the economic calendar. Early in the week, consumer confidence and JOLTs job openings drew interest. Consumer confidence improved in March, with JOLTs job openings coming in better than forecasted.

Mid-week, ADP nonfarm payrolls, and Q4 GDP numbers failed to deliver market support. The release of the stats coincided with a shift in sentiment towards Russia and Ukraine reaching a ceasefire agreement.

According to the ADP, nonfarm payrolls increased by 455k in March, down from 486k in February. The U.S economy also grew at a slower pace than previously estimated.

Market attention then shifted to Thursday, with inflation, personal spending, and jobless claims drawing investor interest.

A further pickup in inflationary pressure supported FED Chair Powell’s more hawkish stance on monetary policy.

While personal spending was weak, nonfarm payrolls rose at a decent clip in March.

In March, nonfarm payrolls increased by 431k, following a 750k increase in February. The March numbers tested appetite for riskier assets, with the markets seeing 431k good enough for a more aggressive FED rate path.

The Market Movers

From the DAX, it was a bullish week for the auto sector. Volkswagen rallied by 4.23%, with BMW and Continental ending the week with gains of 1.43% and 1.55%, respectively. Daimler rose by a more modest 0.44%.

It was yet another bullish week for the banking sector. Deutsche Bank and Commerzbank rose by 1.41% and 0.28%, respectively.

From the CAC, it was a bullish week for the banks. BNP Paribas rallied by 3.38%, with Credit Agricole and Soc Gen gaining 2.25% and 2.69%, respectively.

Things were also bullish for the French auto sector. Stellantis NV and Renault ended the week up 1.87% and 4.70%, respectively.

Air France-KLM and Airbus rose by 1.21% and 3.24%, respectively.

On the VIX Index

It was a fourth consecutive week in the red for the VIX in the week ending April-01, marking the fifth decline in seven weeks.

Following a 12.82% slide from the previous week, the VIX fell by 5.67% to end the week at 19.63.

3-days in the red from 5 sessions, which included a 5.67% decline on Monday, delivered the downside.

For the week, the Dow slipped by 0.12%. The NASDAQ 100 and the S&P500 gained 0.65% and 0.06%, respectively.

VIX 010422 Weekly Chart

The Week Ahead

It’s a relatively busy week ahead on the Eurozone economic calendar. On Monday, trade data from Germany will draw interest ahead of the member state and Eurozone private sector PMIs on Tuesday.

In the second half of the week, the German economy will be back in focus. Factory orders and industrial production will draw attention.

From the U.S, ISM Non-Manufacturing PMI and Jobless claims will draw interest on Tuesday and Thursday.

Away from the economic calendar, Russia’s invasion of Ukraine will remain a key driver in the week. Progress towards a ceasefire would support the European majors.

Volatility Retreats As Stocks & Commodities Rally

The CBOE Volatility Index (VIX) is a real-time index. It is derived from the prices of SPX index options with near-term expiration dates that are utilized to generate a 30-day forward projection of volatility. The VIX allows us to gauge market sentiment or the degree of fear among market participants. As the Volatility Index VIX goes up, fear increases, and as it goes down, fear dissipates.

Commodities and equities are both showing renewed strength on the heels of global interest rate increases. Inflation shows no sign of abating as energy, metals, food products, and housing continues their upward bias.

During the last 18-months, the VIX has been trading between its upper resistance of 36.00 and its lower support of 16.00. As the Volatility Index VIX falls, fear subsides, and money flows back into stocks.

VIX – Volatility S&P 500 Index – CBOE – Daily Chart

VIX

SPY Rallies +10%

The SPY has enjoyed a sharp rally back up after touching its Fibonacci 1.618% support based on its 2020 Covid price drop. Money has been flowing back into stocks as investors seem to be adapting to the current geopolitical environment and the change in global central bank lending rate policy.

Resistance on the SPY is the early January high near 475, while support remains solidly in place at 414. March marks the 2nd anniversary of the 2020 Covid low that SPY made at 218.26 on March 23, 2020.

SPY – SPDR S&P 500 ETF TRUST – ARCA – Daily Chart

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Berkshire Hathaway Record High $538,949!

Berkshire Hathaway is up +20.01% year to date compared to the S&P 500 -4.68%. Berkshire’s Warren Buffet has also been on a shopping spree, and investors seem to be comforted that he is buying stocks again. Buffet reached a deal to buy insurer Alleghany (y) for $11.6 billion and purchased nearly a 15% stake in Occidental Petroleum (OXY), worth $8 billion.

These acquisitions seem to be well-timed as insurers and banks tend to benefit from rising interest rates, and Occidental generates the bulk of its cash flow from the production of crude oil.

As technical traders, we look exclusively at the price action to provide specific clues as to the current trend or a potential change in trend. With that said, Berkshire is a classic example of not fighting the market. As Berkshire continues to make new highs, its’ trend is up!

BRK.A – Berkshire Hathaway Inc. – NYSE – Daily Chart

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Commodity Demand Remains Strong

Inflation continues to run at 40-year highs, and it appears that it will take more than one FED rate hike to subdue prices. Since price is King, we definitely want to ride this trend and not fight it. It is always nice to buy on a pullback, but the energy markets at this point appear to be rising exponentially. The XOP ETF gave us some nice buying opportunities earlier at the Fibonacci 0.618% $71.78 and the 0.93% $93.13 of the COVID 2020 range high-low.

Remember, the trend is your friend, as many a trader has gone broke trying to pick or sell a top before its time! Well-established uptrends like the XOP are perfect examples of how utilizing a trailing stop can keep a trader from getting out of the market too soon but still offer protection in case of a sudden trend reversal.

XOP – SPDR S&P Oil & Gas Explore & Product – ARCA – Daily Chart

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Knowledge, Wisdom, and Application Are Needed

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and somewhat surprisingly, we entered five new trades last week, four of which have now hit their first profit target levels.

Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Sign up for my free trading newsletter so you don’t miss the next opportunity!

Furthermore, successfully trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe.

We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

 

Gold Up, Volatility Down

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The expected daily trading range (EDTR) is swiftly dropping from a war-high of nearly 50 points now to sub-40, and shall further shrink into the new week. Here graphically is Gold’s EDTR from one year ago-to-date, now 37 and still above average, however sinking like a stone:

260322_gold_range

Indeed, the yellow metal’s actual trading ranges this past week exceeded 30 points on just one day (Wednesday).

And more broadly, with the war sadly having morphed into a daily absorbed event, volatility extremes at large are rapidly waning, the revered, oft-feared Chicago Board Options Exchange’s Volatility Index “VIX” actually settling the week below its 200-day moving average for the first time since 09 February.

In fact, within the buzz at a large gathering this past week, we overheard it callously questioned: “Is there a war going on?” Irrespective, the markets have to a degree “moved on”, the S&P 500 itself having netted seven gains in the last nine sessions. Regardless of war, stagflation, increased interest rates, and an S&P price/earnings ratio today 68% above its lifetime median, life apparently is good.

‘Tis good as well for Gold — it recording its 11th up week of the past 15 — in settling yesterday (Friday) at 1958. Price again avoided by mere pips tripping its weekly parabolic Long trend to Short per the rising blue dots next shown here. Now 21 weeks in duration, the Long trend ties for sixth most extensive this century. Yet should 1910 trade in the new week, it all flips to Short; and should you be scoring at home, Gold’s expected weekly trading range is now 66 points:

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Meanwhile from the “Back in Harmony Dept.” we again present the website’s graphic of Gold vis-à-vis its smooth valuation line, (borne of price’s changes relative to those of the other four primary components which comprise the BEGOS Markets: Bond / Euro / Gold / Oil / S&P 500). Here below, the lower panel oscillator (Price less Valuation) is the key: at its recent closing spike, (Gold 2058 on 03 March), price was nearly 200 points above the smooth line; today combined with the duly rising line and price fade, the two returned to harmony this past week at the oscillator level of 0 (zero).

But obviously by the opening Scoreboard’s debasement value of 4071, Gold remains wildly underpriced, just as ’tis by our forecast high for this year of 2254. For the present, here’s the in-harmony graphic:

260322_gold_value

That mouthful said, given Gold in the technical vacuum is quite stretched to the upside, our near-term sense is price trading between, say, 2000 and the underlying support zone (as last week shown) spanning 1854-1779. However: with Gold “awareness” being renewed, our 2254 target remains well in view.

Gold-optimistic as ever, eh mmb?

Squire mon vieux, were we not, we wouldn’t be writing.

As for the “They’re Just Figuring This Out Now Dept.” (aka the “Federal Reserve”), Chair Powell went on record this past week saying that interest rates need be quickly raised. And as you regular readers know, we’ve not ruled out a Volckeresque “Saturday Night Massacre” akin to 06 October 1979. (Yes, ’tis a bit of a stretch perhaps). But in peering ahead at next week’s incoming stream of 15 metrics for the Economic Barometer, Thursday (31 March) brings the Fed’s favoured inflation gauge: Core Personal Consumption Expenditures.

For four consecutive months, the reading has been at a steady annualized pace of +6.0%. But ’tis “expected” this time ’round to have “cooled” a tad to +4.8%. Nonetheless comparatively: the “riskless” US 30-Year Bond yield is only 2.603%; the 10-Year Note only 2.492%; and the three-month Bill only 0.520%. Then there’s the “riskfull” S&P 500 yield which settled the week at only 1.406%.

“But people don’t buy stocks anymore for yield, mmb, ’cause they only go up and up and up, right?”

To Squire’s point, the S&P 500 from 1970-to-date (with its regression channel):

260322_sp_de_1970

Further in support thereto, Dow Jones Newswires reported this past week that older Americans are “flush with housing and stock portfolio wealth”. Living the marked-to-market illusion is a beautiful thing. Living the reality of the falling Econ Baro is another thing:

260322_econbaro

And notable (or perhaps better stated notorious) amongst last week’s brief set of stagflating metrics was shrinkage in February for both Pending Home Sales (-4.1%) and Durable Orders (-2.2%). But thankfully, the straight-up S&P is oblivious to it all… “Whew!”

Not so oblivious to price’s recent spike and fade are Gold’s daily bars below on the left from three months ago-to-date. The baby blue dots of 21-day linear regression consistency are smack on their 0% axis, meaning that measure is now trendless, (which for you WestPalmBeachers down there means ’tis El Flato). Below on the right is Gold’s 10-day Market Profile, its 1935-1924 area bellying-out as near-term trading support:

260322_gold_dots_profile

Silver continues her precious (rather than industrial) metal stance as her like two-panel presentation is spot on with that for Gold, the neutral “Baby Blues” at left and Profile at right, wherein we see 25.15 as near-term trading support:

260322_silver_dots_profile

So with just under a week to run until March is done here we’ve the present state of the Stack:

The Gold Stack

  • Gold’s Value per Dollar Debasement, (from our opening “Scoreboard”): 4071
  • Gold’s All-Time Intra-Day High: 2089 (07 August 2020)
  • 2022’s High: 2079 (08 March)
  • Gold’s All-Time Closing High: 2075 (06 August 2020)
  • Trading Resistance: 1963 / 1980

Gold Currently: 1958, (expected daily trading range [“EDTR”]: 37 points)

  • 10-Session “volume-weighted” average price magnet: 1937
  • Trading Support: 1935-1924
  • The Weekly Parabolic Price to flip Short: 1910
  • The Gateway to 2000: 1900+
  • 10-Session directional range: down to 1895 (from 1995) = -100 points or -5.0%
  • The 300-Day Moving Average: 1811 and rising
  • The Final Frontier: 1800-1900
  • The Northern Front: 1800-1750
  • 2022’s Low: 1779 (28 January)
  • On Maneuvers: 1750-1579
  • The Floor: 1579-1466
  • Le Sous-sol: Sub-1466
  • The Support Shelf: 1454-1434
  • Base Camp: 1377
  • The 1360s Double-Top: 1369 in Apr ’18 preceded by 1362 in Sep ’17
  • Neverland: The Whiny 1290s
  • The Box: 1280-1240

Finally, to wrap, we have this:

The iconic Carl Icahn — who by our reckoning has got to be some 120 years old by now — remarked this past Tuesday to the FinMedia that there “…very well could be a recession or even worse…” Clearly Carl keeps an eye on the Econ Baro. And eye, too, Gold: range is tightening, but the future worth sighting!

260322_oeil_sur_or

Cheers!

www.TheGoldUpdate.com

European Equities: A Week in Review – 25/03/22

The Majors

It was a mixed week for the European majors in the week ending 25th March.

The EuroStoxx600 slipped by 0.06%, with the CAC40 and the DAX ending the week down by 1.01% and 0.74%, respectively.

Disappointing economic data from the Eurozone, surging crude oil prices amidst inflation concerns, and hawkish Fed Chair Powell chatter contributed to the losses.

Russia’s continued bombing of civilian sites in Ukraine remained market negative, with the ECB highlighting the downside risks of the invasion to the Eurozone economy.

The Stats

Prelim private sector PMI figures for France, Germany, and the Eurozone were in focus on Thursday.

While the PMIs came in ahead of forecasts, private sector activity grew at a slower pace in March. The Eurozone’s composite PMI fell from 55.5 to a 2-month low of 54.5. Weighing on private sector activity was the manufacturing sector. The Eurozone’s manufacturing PMI fell to a 14-month low of 57.0.

On Friday, German business sentiment figures also disappointed, with the manufacturing sector weighing on headline figures. The IFO Business Climate Index fell from 98.5 to 90.8. While current sentiment remained resilient, the expectations indicator tumbled from 98.4 to 85.1.

From the ECB, the Economic Bulletin added to the doom and gloom, with the ECB highlighting uncertainty ahead and risks to the economy tilted to the downside.

From the U.S

It was a mixed week on the economic data front. Core durable goods and consumer sentiment were disappointing, while private sector PMI and labor market numbers were upbeat.

According to prelim figures, the U.S Services PMI rose from 56.5 to 58.9, with the manufacturing PMI up from 57.3 to 58.5. In the week ending 18th March, jobless claims fell back to sub-200k levels, also market positive.

Core durable goods orders fell unexpectedly, however, with consumer sentiment waning in March.

On the monetary policy front, Fed Chair Powell took a hawkish stance on interest rates. Early in the week, Powell talked of a willingness to take a more aggressive rate path to curb inflation.

The Market Movers

From the DAX, it was a mixed week for the auto sector. Continental and Volkswagen ended the week with losses of 3.57% and 1.78%, respectively. BMW rallied by 2.62%, however, with Daimler ending the week up 0.93%.

It was another bullish week for the banking sector. Deutsche Bank rallied by 5.75%, with Commerzbank gaining 2.29%.

From the CAC, it was a bearish week for the banks. BNP Paribas led the way, sliding by 6.28%, with Soc Gen and Credit Agricole seeing losses of 3.02% and 1.93%, respectively.

Things were also bearish for the French auto sector. Stellantis NV and Renault ended the week down 1.53% and 1.33%, respectively.

Air France-KLM and Airbus rose by 2.90% and 1.32%, respectively.

On the VIX Index

It was a third consecutive week in the red for the VIX in the week ending 25th March, marking the fourth decline in six weeks.

Following a 22.37% slide from the previous week, the VIX fell by 12.82% to end the week at 20.81.

4-days in the red from 5 sessions, which included an 8.06% slide on Thursday, delivered the downside.

For the week, the Dow rose by 0.31%, with the NASDAQ 100 and the S&P500 gaining 1.98% and 1.79%, respectively.

VIX 260322 Weekly Chart

The Week Ahead

It’s a relatively busy week ahead on the Eurozone economic calendar. Early in the week, the German economy will draw attention. Consumer confidence figures are due out.

On Thursday, the focus will remain on the German economy. Retail sales and unemployment figures are in focus.

At the end of the week, manufacturing sector PMIs for member states and the Eurozone will also draw more interest.

On the inflation front, prelim March inflation figures for member states and the Eurozone will be key. The markets expect another surge in consumer prices, which will test support for riskier assets.

From the U.S, consumer confidence, ADP nonfarm employment, and Q4 GDP numbers will influence early in the week.

Expect consumer confidence and ADP numbers to be key.

On Thursday, attention will shift to personal spending, inflation, and jobless claims figures.

The key stat of the week, however, will be the nonfarm payroll numbers due out on Friday.

On the monetary policy front, FOMC member chatter will need monitoring.

Away from the economic calendar, Russia’s invasion of Ukraine will remain a key driver in the week.

Does This S&P 500 Rally Have Legs?

As I have discussed much in recent months, we are unequivocally experiencing a growth cycle downturn that is only going to accelerate materially to the downside over the coming quarters. However, for now, it appears as though the stock market may have jumped the gun and as such could offer some respite over the coming weeks. Any such relief would undoubtedly be a gift to investors.

S&P 500 Technical Analysis

Following the 15% peak to trough fall in the S&P 500, we have since retaken the important 4,300-4,400 level after what appears to be a false breakdown below. From a technical perspective, having so easily retaken this level is certainly a positive outcome for now.

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Though I do not expect new all-time highs any time soon, should we be able to hold 4,300 in the S&P 500 and the price action make a higher low, this could help provide a solid base for a continuation of this bear market rally. However, should we rollover and lose 4,300, then the bullish short-term thesis presented herein is likely null and void.

Nasdaq Technical Analysis

For the Nasdaq, we have seen this rally also retake the important $350 level on the Q’s, which again if held could provide a solid foundation for at the very least a continued consolidation into Easter. I do believe this to be the highest probability outcome over the coming weeks.

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Seasonality

Indeed, it is important to remember we are entering the most seasonally favourable period for stocks over the month of April. This period of positive seasonality is particularly prevalent for those stocks and assets of a high-beta and pro-cyclical nature. And yes, whether you care to admit it or not, there are structural reasons in the market why seasonality does matter.

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Historical Analogs

If we look at historical analogs of years past whereby stocks performed in a similar manner to what we have experienced thus far in 2022, we can see how markets have historically rallied out of March through April. Though I am not necessarily a fan of using historical price analogs, it does help provide us with some historical guidance.

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What we have so far seen this year is investors seemingly positioning themselves a little too bearish too soon. Per the work of the excellent Darius Dale at 42 Macro, we can see below that when investors are flocking to defensive market sectors (i.e. those who perform best when economic growth is slowing, such as utilities) to such an extreme degree that the purple line enters the consensus fear zone and then exits this area as the market falls (as investors reallocate and buy dips in more pro-cyclical stocks), this has generally been a bullish outcome over the immediate term. Though it is difficult to see below, 42 Macro’s Cross-Asset Correction Risk Indicator has just left the consensus fear zone, a historically bullish short-term outcome in the majority of cases.

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Source: 42 Macro

Relative Performance

Indeed, we can illustrate this differently by comparing the relative performance of some of the most economically sensitive sectors in the stock market. The retail, transports, metals & mining, materials and industrials sectors were clear underperformers as the market topped in December and have since outperformed, as we can see below.

Encouragingly, all of these sectors barring retail appear to be outperforming to the upside amid the current rally. Watching out for relative underperformance of these economically sensitive sectors should the broad market rally continue will help provide us with an excellent indication of when the market may again roll over.

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Risk Appetite

In a similar manner, various risk appetitive measures of investors are too confirming strength to the upside. Again, watch for negative divergences among these investor risk appetite indicators for rally exhaustion.

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Liquidity

Also potentially supportive of the stock market for now is net liquidity (as measured below by the Fed balance sheet less the Treasury general account). Net liquidity will become a significant headwind for stocks once the Fed accelerates its monetary tightening and reduction of their balance sheet in May, but for now, stocks look to have gotten a little bit ahead of themselves in pricing in the pending reduction in liquidity.

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Given how closely the performance of the S&P 500 has tracked liquidity of late, we could see liquidity provide support to stocks over the coming months prior to when the Fed actually starts its taping program in May.

Volatility Analysis

What has also clearly supported (or perhaps more accurately was the direct culprit) of the recent rally was the fact that last Friday’s quarterly options expiry saw roughly 30% of S&P 500 Gamma being wiped from option dealers books. Given we were in negative Gamma territory pre-OPEX, this significant reduction in Gamma positioning resulted in dealers buying-back a significant amount of their short S&P 500 delta hedges, and coupled with bullish Vanna flows as implied volatility collapsed sharply last week helped squeeze the market higher. The tail continues to wag the stock market dog.

Whether or not we see any bullish Vanna flows from here remains to be seen. The VIX has already fallen to the low 20s and would likely need to go sub-20 to precede significant further Vanna flows. Seasonality certainly favors this outcome as we enter a very unfavorable seasonal period for the VIX. One would however expect implied volatility to remain somewhat heightened given the current geopolitical backdrop and poor economic growth outlook.

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As of now, we remain above the short-gamma volatility trigger (per the work of Spot Gamma below) and thus could see a more stable market over the next month, potentially providing the possibility of further positive Vanna and Charm flows into Easter.

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Source: Spot Gamma

However, as investors have given up much of their downside protection following March’s expiry and haven’t replaced this protection over, then if markets were to roll over and continue lower we could well see a significant pick-up in put buying as investors seek to protect their downside. This may reflexively then result in a continued move lower as dealers would need to delta hedge their books by selling the underlying against their short put positions, such is the power of the options markets on stocks these days. Should such a scenario unfold then the put wall around 4,100 looks to be the next major support level.

Dark Pool Activity

The fact that dark pool activity for the S&P 500 has seen its most bullish period over the past month since early 2020 certainly leaves me with a bullish bias over the next few weeks. Similar dark pool readings in the past have provided a tailwind for forward 30-60 day returns.

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Source: Squeeze Metrics

Corporate Buyback Authorizations

Likewise, there remains a record number of corporate buyback authorizations set to enter the market this year, a dynamic which could again help provide support to markets over the next month or two before the growing headwinds in slowing growth and monetary tightening drag down markets.

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Source: Goldman Sachs

Clearly, whilst I do believe we are amidst the beginnings of a bear market in stocks that could encompass much of 2022, there is evidence to suggest this current rally could continue or at the very least consolidate over the next few weeks. Whilst I am not championing for an opportunity to go tactically long, further strength in stocks presents an opportunity to take profits and accumulate cheaper hedges as implied volatility continues lower.

Summary and Key Takeaways

  • Barring a significant news event or external catalyst, stocks seemingly have the potential to continue to rally into Easter during what is a seasonally favourable period. The May FOMC meeting could be the negative catalyst that ushers in the next wave lower as the Fed becomes more aggressive with their tapering plans.
  • As a result, any prior continued rally would be a gift given the particularly bearish economic and fundamental outlook for the second half of 2022. Should implied volatility also continue lower over the coming weeks, this would allow investors a golden opportunity to add additional downside hedges.

European Equities: A Week in Review – 18/03/22

The Majors

It was another bullish week for the European majors in the week ending 18th March.

The EuroStoxx600 rose by 5,26%, with the CAC40 and the DAX ending the week up by 5.75% and 5.76%, respectively.

Despite the ongoing Russian invasion of Ukraine, talks of a ceasefire delivered mid-week support. The hope of fresh stimulus from China to support the Chinese economy was also market positive. A retreat in crude oil prices in the week added further support.

Economic data from the Eurozone took a back seat, despite a slump in economic sentiment towards Germany and the Eurozone.

FED monetary policy also failed to spook the markets, with the FED lifting rates by just 25 basis points on Wednesday.

The Stats

ZEW Economic sentiment figures for Germany and the Eurozone disappointed in the week. The markets were expecting weak numbers, however, as analysts assess the impact of the Russian invasion of Ukraine on the economic outlook.

Late in the week, Eurozone trade data and wage growth had a muted impact on the EUR. The impact was muted despite wages growing at a softer pace in Q4 and the Eurozone’s trade deficit widening from €4.6bn to €27.2bn in January.

From the U.S

In the first half of the week, wholesale inflation and retail sales were the key stats. The numbers were mixed.

The core producer price index increased by 0.2% in February, which was softer than a 1.0% rise in January.  For riskier assets, the softer wholesale inflation figures were market positive.

More significantly, retail sales were also disappointing. Core retail sales rose by just 0.2%, with retail sales up 0.3% in February. Both had seen marked increases in the month prior.

Jobless claims and Philly FED Manufacturing numbers were more upbeat later in the week. In February, the Philly FED Manufacturing PMI rose from 16.0 to 27.4, with initial jobless claims falling from 229k to 214k in the week ending 10th March.

While the stats drew plenty of interest, the FED monetary policy decision and projections were key in the week.

In line with market expectations, the FED raised interest rates by 25 basis points on Wednesday, with interest rate projections hawkish for the remainder of the year. Interest rates are projected to hit 2.8% by Q1 2023 versus a previously forecast of 0.9%.

From China

Fixed asset investment and industrial production figures were in focus. The numbers didn’t disappoint, though concerns over renewed lockdown measures to contain a new wave of COVID-19 infections overshadowed the upbeat numbers.

In February, fixed asset investments rose by 12.2%, year-on-year, up from 4.9% in January.

Industrial production increased by 7.5%, up from 4.3% in January.

The Market Movers

From the DAX, it was a bullish week for the auto sector. Continental rallied by 7.79%, with Volkswagen gaining 7.11%. BMW and Daimler ended the week up 4.81% and 6.90%, respectively.

It was a better week for the banking sector. Deutsche Bank and Commerzbank surged by 14.94% and 12.18%, respectively.

From the CAC, it was a bullish week for the banks. Soc Gen led the way, rallying by 10.36%, with BNP Paribas and Credit Agricole seeing gains of 8.81% and 9.34%, respectively.

Things were also bullish for the French auto sector. Stellantis NV and Renault ended the week up 9.25% and 4.48%, respectively.

Air France-KLM and Airbus rose by 6.87% and 2.49%, respectively.

On the VIX Index

It was a second consecutive week in the red for the VIX in the week ending 18th March, marking the third decline in 5 weeks.

Following a 3.85% fall from the previous week, the VIX slid by 22.37% to end the week at 23.87.

4-days in the red from 5 sessions, which included a 10.59% slide on Wednesday, delivered the downside.

For the week, the NASDAQ jumped 8.18%. The Dow and the S&P500 rallied by 5.50% and 6.16%, respectively.

VIX 190322 Weekly Chart

The Week Ahead

It’s a relatively busy week ahead on the Eurozone economic calendar. Prelim March private sector PMIs for France, Germany, and the Eurozone will be the key stats of the week. The PMIs are due on Thursday, ahead of Germany’s IFO Business Climate Index figures on Friday.

From the U.S, economic data on Thursday will influence.

Key stats include jobless claims, core durable goods, and March’s prelim services PMI.

Away from the economic calendar, news updates on Russia’s invasion of Ukraine and any moves by China will also need monitoring.

European Equities: A Week in Review – 04/03/22

The Majors

The European majors nosedived in the week ending 4th March, with Russia’s invasion of Ukraine delivering the worst week since 2020.

The EuroStoxx600 tumbled by 7.00%, with the CAC40 and the DAX ending the week down by 10.11% and by 10.23%, respectively.

Economic data took a back seat once more, with Russia’s bombing of civilian targets and capture of Europe’s largest nuclear plant hitting market risk sentiment. Failure by the West to defuse the situation with hefty sanctions also added to the market angst.

The Stats

Private sector PMIs for February and the German economy were in focus throughout the week.

Better than expected private sector PMI numbers for Italy and Spain were market positive. With France and Germany also seeing private sector activity pick up in February, the Eurozone’s composite PMI increased from 52.3 to 55.5.

From Germany, the unemployment rate fell from 5.1% to 5.0%, with Germany’s trade surplus widening from €8.1bn to €9.4bn in January.

Other stats included finalized February inflation figures for member states and the Eurozone and retail sales and unemployment numbers for the Eurozone. The numbers failed to draw interest, however.

From the U.S

Private sector PMIs and nonfarm payrolls were the key stats of the week.

In February, the ISM Manufacturing PMI rose from 57.6 to 58.6, while the Non-Manufacturing PMI fell from 59.9 to 56.5.

While the services PMI disappointed, nonfarm payrolls jumped by 678k in February. As a result of another marked increase in hiring, the unemployment rate fell from 4.0% to 3.8%.

FED monetary policy was in focus on Wednesday, with FED Chair Powell delivering testimony on Capitol Hill. Talk of a more cautious move later this month spurred demand for riskier assets. Powell told lawmakers: “there are events yet to come and we don’t know what the real effect on the U.S. economy will be.” The FED Chair reportedly added that he favored a 25 basis point rate hike in March and then larger and more frequent rate hikes if needed.

From Elsewhere

Private sector PMIs from China were also market positive. In February, the all-important Caixin Manufacturing PMI rose from 49.1 to 50.4, with the services PMI up from 49.1 to 50.4.

The Market Movers

From the DAX, it was a particularly bearish week for the auto sector. Continental and Volkswagen tumbled by 21.76% and by 22.03%, with BMW and Daimler ending the week down by 16.95% and by 19.51%, respectively.

It was a dire week for the banking sector. Deutsche Bank slumped by 22.98%, with Commerzbank tumbling by 26.81%.

From the CAC, it was a grim week for the banks. Soc Gen slumped by 26.85%, with BNP Paribas and Credit Agricole ending the week with losses of 16.85% and 17.33%, respectively.

Things were not better for the French auto sector. Stellantis NV slid by 18.14%, with Renault down 24.32%.

Air France-KLM ended the week down by 13.30%, with Airbus sliding by 16.24%.

On the VIX Index

It was back into the green for the VIX in the week ending 4th March, marking the 5th rise in 8 weeks.

Reversing a 0.58% decline from the previous week, the VIX rose by 15.91% to end the week at 31.98.

3-days in the green from 5 sessions, which included a 9.28% rise on Monday and a 10.51% jump on Tuesday delivered the upside.

For the week, the NASDAQ slid by 2.78%, with the Dow and the S&P500 falling by 1.30% and 1.27%, respectively.

VIX 050322 Weekly Chart

The Week Ahead

It’s another busy week ahead on the Eurozone economic calendar. The German economy will be in focus, with retail sales, factory orders, and industrial production due out. For the Eurozone, 4th quarter GDP numbers should have a muted impact on the majors on Tuesday.

On the monetary policy front, the ECB monetary policy decision and press conference on Thursday will likely overshadow the stats, however. Surging fuel prices amidst the current inflation environment coupled with Russia’s invasion of Ukraine brings significant economic and policy uncertainty. With the ECB in focus, the EU Leaders Summit late in the week will also be a key driver.

From the U.S, inflation and jobless claims figures will draw interest, with inflation likely to have the greater impact. Stats from China will also provide direction, with trade data and inflation figures due out.

While the stats will draw interest, geopolitics will remain the key driver. The markets will be looking for some progress towards ending Russia’s invasion of Ukraine. A continued Russian escalation will deliver another blow to the European majors.

S&P 500 At Tipping Point To Start A Bear Market And What You Need To See

Is a bear market on the way? My research suggests the downward sloping trend line (LIGHT ORANGE in the Daily/Weekly SPY chart below) may continue to act as solid resistance – possibly prompting a further breakdown in the markets for US major indexes.

As we’ve seen recently, news and other unexpected events prompt very large price volatility events in the US major indexes. For example, the VIX recently rose above 30 again, which shows volatility levels are currently 3x higher than normal levels.

Increased Volatility & The Start Of An Excess Phase Peak Should Be A Clear Warning

This increased volatility in the markets, coupled with the increased fear of the US Fed and the global unknowns (Ukraine, China, Debt Levels, and others), may be just enough pressure to crush any upside price trends over the next few months. Technically, my research suggests the $445 to $450 level is critical resistance. The SPY must climb above these levels to have any chance of moving higher.

Unless the US markets find some new support and attempt to rally back towards recent highs, an “Excess Phase Peak” pattern will likely continue to unfold throughout 2022. This unique price pattern appears to have already reached a Phase 2 or Phase 3 setup. Please take a look at this Weekly GE example of an Excess Phase Peak pattern and how it transitions through Phase 1 through Phase 4 before entering an extended Bearish price trend.

Read this research article about Excess Phase Peaks: HOW TO SPOT THEN END OF AN EXCESS PHASE – PART 2

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SPY May Already Be In A Phase 4 Excess Peak Phase

This Daily SPY chart highlights my analysis, showing the major downward sloping trend line, the Middle Resistance Zone, and the lower Support Zone. Combined, these are acting as a “Wedge” for price over the past few weeks – tightening into an Apex near $435~440.

If the US major indexes attempt to break this downward price trend, then the price must attempt to move solidly above this downward sloping price channel and try to rally back into the Resistance Zone (near $445~$450). Unless that happens, the price will likely transition into a deeper downward price move, attempting to break below recent lows, near $410, and possibly quickly moving down to the $360 level.

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SPY Weekly Chart Shows Consolidation Near $435 – Possibly Starting A Phase 4 Excess Peak

Traders should stay keenly aware of the risks associated with the broad US and global market decline as the Ukraine war, and other unknowns continue to elevate fear and concerns related to the global economy. In my opinion, with the current excess global debt levels, extended speculative market bubbles, and the continued commodity price rally, we may be starting to transition away from an extended growth phase and into a deeper depreciation cycle phase.

My research suggests we entered a new Depreciation cycle phase in late 2019 and are already more than 25 months into a potential 9.5-year global Depreciation cycle. What comes next should not surprise anyone.

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Traders should stay keenly focused on market risks and weaknesses. I expected the conflict in Ukraine to have been priced into the US markets over the past 7+ days. However, I believe the markets were unprepared for this scale or invasion and will attempt to settle fair stock price valuation levels as the conflict continues. This is not the same US/Global market Bullish trend we’ve become used to trading over the past 5+ years.

Looking Forward – preparing for a possible Bear market

Market dynamics and trends are changing from what we have experienced over the past 40 years for stocks and bonds. The 60/40 portfolio is costing you money now. Traders need an edge to stay ahead of these markets trends and to protect and profit from big trends.

The only way to navigate the financial markets safely, no matter the direction, is through technical analysis. By following assets and money flows, we identify trend changes and move our capital into whatever index, sector, industry, bond, commodity, country, and even currency ETF. By following the money, you become part of new emerging trends and can profit during weak stock or bond conditions.

Want Trading Strategies that Will Help You To Navigate Current Market Trends?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

I invite you to learn more about how my three Technical Trading Strategies can help you protect and grow your wealth in any type of market condition by clicking the following link:   www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

 

The Put / Call Ratio – A Technique Used To Gauge Market Extremes

First, a quick review of what Calls and Puts are. Calls are option contracts that increase in value from a RISE in the price of the underlying stock or index. Puts are option contracts that increase in value from a DROP in the price of the underlying stock or index.

Let’s jump in and see what’s “under the hood” and how we might use that to better inform our decision-making as traders and investors.

What Is the Put / Call Ratio?

The PCR is a contrarian indicator based on the idea that market participants tend to get too bearish or bullish shortly before a reversal is about to materialize. When the market is at a point of extreme bearishness, participants tend to buy more Puts than usual. Conversely, when the market is at a point of extreme bullishness, participants tend to buy more Calls than normal. Contrarian logic suggests that most participants tend to be wrong when the market is near inflection points.

Mathematically the Put / Call Ratio is simply the number of Puts divided by the number of Calls. A value of 1 would indicate that the same number of Calls and Puts are being purchased. A value greater than 1 indicates more Puts than Calls purchased. It follows that a value below 1 means that more Calls than Puts are purchased.

The PCR can be calculated using either open interest or volume of contracts. It can be calculated for individual stocks and for indexes. Most trading and charting platforms have several versions of the PCR available for the major indexes. Indexes generally have charts available, while individual stocks may only have daily numerical value readily available. The PCR is generally more useful as an overall market sentiment indicator for the major indexes like the S&P 500.

For most underlying, including major indexes like the S&P 500, the PCR tends to be below 1 much of the time. That makes some sense, as major indexes tend to have a long-term bullish bias. But in times of elevated fear, Put buying tends to be elevated in a rush to buy portfolio “insurance”. Outright bets on a market decline can add to that volume.

How Do I Use the pcr?

It helps to understand what “normal” behavior is for the number of Calls and Puts purchased for the particular index or stock. For an index like the S&P 500, a PCR of 0.9 or above suggests heavy Put buying and is typically seen as bullish from the contrarian view. For reference, at the height of the dot-com bubble in March 2000, the PCR dropped to as low as 0.39. Lots of calls were being purchased as the market was peaking.

Let’s look at some recent examples where we see the Put / Call Ratio at extreme levels. Below we see a chart of the S&P 500 displayed with Heikin Ashi candles overlayed with the PCR (magenta line).

In the first instance (circled in magenta), we see a low in the PCR where significantly more Calls than Puts were purchased. When interpreted as a contrarian indicator, that suggests bearishness to come. And indeed, we do see five days of bearishness to follow.

We then see a sharp reversal to a relatively high PCR (blue circle), and we do see a bullish reversal that lasted for six days.

At the yellow circle, we see a spike up in the PCR accompanied by a sharp increase in the underlying volume. However, we see a few days delay before the bullish reversal materializes in this instance. And the market was rather volatile on those days, as evidenced by the tall candles with long tails.

At the green circle, we have a somewhat elevated PCR and another delayed reversal.

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Conclusion

The PCR is not particularly useful in sideways markets. But it can be useful at market extremes, albeit at times with some delay.

Like many indicators, the PCR is far from 100% reliable unto itself. Used in conjunction with volume, volatility (VIX), support/resistance levels, trendlines, moving averages, and other technical indicators, the PCR can give us valuable clues about market sentiment and when a reversal may be in the making.

Now That You Know more About the put / call ration, Read On To Learn More About Options Trading

Every day on Options Trading Signals, we do defined risk trades that protect us from black swan events 24/7. Many may think that is what stop losses are for. Well, remember the markets are only open about 1/3 of the hours in a day. Therefore, a stop loss only protects you for 1/3 of each day. Stocks can gap up or down. With options, you are always protected because we do defined risk in a spread. We cover with multiple legs, which are always on once you own.

If you are new to trading or have been trading stock but are interested in options, you can find more information at The Technical Traders – Options Trading Signals Service. The head Options Trading Specialist Brian Benson, who has been trading options for almost 20 years, sends out real live trade alerts on actual trades, such as TSLA and NVDA, with real money. Ready to subscribe, click here:  TheTechnicalTraders.com.

Enjoy your day!

Chris Vermeulen
Founder & Chief Market Strategist
TheTechnicalTraders.com