With bonds making successive new highs, and stocks adding to their more than 7% rally month-to-date as a return to QE was all but confirmed by key central banks globally, commodities also saw gains, with gold and crude oil surging on a combination of renewed stimulus and political tensions between the US and Iran. In short, its been a great week to be long pretty much anything!
But that’s not to say that you can afford to abandon your trading process. Not surprisingly, the best returns are often generated in the highest conviction ideas, which we share with Trading Club members in our weekly video analysis. Let’s take a look at a few that we have been discussing recently…
First up, the US dollar. Arguably the most important market to follow for global macro traders, this is where the real money is at stake. With so many correlated assets trading in line with the greenback, you cannot afford to ignore whats happening here (just ask the guys who were short gold recently!). But it doesn’t have to be so complicated in trading the second derivative - sometimes there is a setup in the currency itself, as we identified earlier this week. With our US dollar Checklist negative, we looked to the Euro for a potential long EUR/USD trade.
As you can see, the score for our Euro Checklist was +1.5, which suggested that the common currency should outperform the global reserve currency.
But as ever in trading, timing is all-important, and this week the market gods were kind enough to present an opportunity where EUR/USD (which we were looking to 'long’) was short-term oversold around 1.12. This provided a high conviction setup for us to buy EUR (sell USD), particularly given the bullish divergence on the hourly RSI (do you see it?).
Hey presto! With a compelling long setup catalysed by the dovish comments from the Fed, the next trading day saw a rally above 1.13, closing in on a 3-month high set a couple of weeks ago. Trading Club members learned about this setup in real time on Wednesday morning.
Elsewhere, it was worth remembering that the business cycle remained in expansionary mode, signalling growth in the corporate sector (think: stock market Earnings Per Share). Although the trend has been weakening, it has yet to reverse, and with a new round of economic stimulus being prepared, it looked bullish either way you looked at the situation (as I noted on Twitter earlier this week).
Here’s our Business Cycle Checklist, which inspires confidence in the economy (despite consensus fear) with a score of +3.
With this in mind, it’s easy to remain positioned for ‘good news’ and positive surprises in the equity market by holding quality stocks such as Microsoft, Disney and Heineken as we have featured in our Trading Club recently. In each case below, you can see that these stocks continue to make new highs and are also displaying positive relative strength in the ratio line (pink) in the lower panel, meaning that they are outperforming the MSCI World Index.Turn off the financial "news" and let the fundamentals do the talking!
Thanks for reading this week, I hope you enjoyed this roundup from behind my Bloomberg terminal. Our Checklist process helps you to be ahead of the game and better informed than many investors who do not employ the same tools that we do as professional fund managers (and honest educators!). If you would like to learn more, join us as a member of our Trading Club or learn from Lex with our Million Dollar Traders online course.
Have a great weekend,
James Helliwell | Chief Investment Strategist
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