August was a month fraught with market uncertainty. Despite fears of a nuclear war between the United States and North Korea, last month we shared with you our Market Indicators checklist which showed a score +2 and explained how this was supportive of risk assets such as equities, industrial commodities and certain currencies, in spite of this.
With investor anxiety returning on reports of North Korea firing a missile over Japan (sending the Dow Jones down triple digits, and VIX up as much as 20%), we see it as timely to provide an update on what Lex and I see in the same checklist heading in to September.
Our Market Indicators checklist provides a reference for what we should be looking to do as investors over the coming month - and is based on facts, not opinions. The checklist provides a similar process to that followed by many of the best hedge fund managers and professional traders to analyse markets. We have similar versions to assess stocks, currencies and commodities including, and score each factor +1, -1 or 0 depending on whether they are positive, negative or neutral for the coming month. A positive total score indicates a potential buying opportunity, and a negative score suggests that you should look to sell (closing long positions or going short). A neutral score of 0 suggests avoiding trades when there is no clear bias. Let’s take a look at this approach in detail, which is based on our experience as professional investors.
Monthly indicators. The monthly indicators look pretty bad this month, with 5 reds indicating deterioration in the majority of components we track. With the exception of US building permits, each of the PMI indices show declines (although most are well above 50, and therefore still towards healthy levels). Improvement can be seen in container shipments and US retail sales, although insufficient to offset the negative data. The result is a -3 on our monthly indicator scorecard, which receives a -1 on our checklist. It is interesting to note that this scorecard was positive last month, so a reversal is taking place here. Definitely something that Lex and I will be monitoring. (-1)
Short-term indicators. Having seen a negative picture in the monthly indicators, we see reasons to be more optimistic in the short-term indicators. The scorecard has a total of +6, with 7 greens and 2 reds this month. If you dismiss the US Steel Utilization Index as basically unchanged, then the only real decline is in the European Citi Economic Surprise Index. It is worth noting that whilst many of these data are available daily, we look at the month-over-month change here (Trading Club members receive this in our weekly market report every Monday showing the week-to-week change). This is definitely positive for risk markets. (+1)
Leading indicators. The leading indicators we track are derived from market prices and therefore updated on a daily basis. As you can see, there are various sectors and sector ratios, emerging market equities, Spain Credit Default Swaps and commodity prices including crude oil, iron ore and copper. Last month the scorecard showed improvement in all of the measures, which is pretty rare in itself. This month the expansion has normalized, with a mix of red and green leaving the overall scorecard neutral overall. Notable changes can be seen in the semiconductors and industrial metals, and Spain CDS also rose on renewed concerns over sovereign credibility. (0)
Sentiment indicators. We view sentiment as contrarians. Usually if the fundamental picture is improving, then investors will have begun to position accordingly. However, with a neutral leading indicators scorecard and conflicting short-term and monthly indicator readings this month, the read on sentiment is all the more interesting. In this case we see more green than red, and a score of +2 indicating that investors have been mostly acting on fear by selling. Although it is not a particularly high score, it may still be considered a positive for us. (+1)
Overall we see a positive total of +1 on our market indicators checklist heading in to September. Whilst this suggests that investors should expect riskier assets to outperform their ‘safe haven’ counterparts, the overall score has receded from +2 last month. This suggests a note of caution if referring to the checklist in your analysis this month, and reflects perhaps the impact that increased global uncertainty may be having on the real economy.
This suggests that risk assets should outperform 'safe havens’ for the foreseeable future, and supports trading equities and cyclical commodities like crude oil from the long side. Of course, you must then do your homework to discriminate between good and bad investments within risk markets, just as we do in our Trading Club and have featured in our recent blog posts. Of course, you must still do your homework to discriminate between good and bad investments within risk markets, just as we do at our Trading Club. (+1)
Regardless of whether you trade or invest in stocks, currencies or commodities, all markets are influenced by the degree of fear and greed in the market, and risk appetite amongst investors. The factors captured by our market indicators checklist cut through the noise and provide an objective analysis of this to put you at an informational advantage over other investors trading without this clear process. Join us at the Academy to ensure that you are on the right side of the market and apply this same process to stocks, currencies and commodities, with expert analysis from Lex van Dam and myself each month.
Have a great week trading,
Chief Investment Strategist
Lex van Dam Trading Academy
Join James Helliwell and Lex van Dam and receive a full analysis of equities, currencies and commodity markets each month as a Trading Club member.
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