I hope you’ve had another good week (relatively speaking) in lockdown! As the UK government announced a 3-week extension to it’s imposed isolation, countries such as Germany and the United States unveiled plans to restart their economies. Equity futures have rallied hard on the news going into Friday morning, as the S&P 500 index looks set to extend gains from the lows seen around 1 month ago. Despite this wave of optimism, our Checklist process presents conflicting evidence which suggests that this rally may be nearing its peak.
Here you can see the S&P 500 futures back to their 200-day moving average at 2860 this morning. The cash market closed at 2800 yesterday and has ‘gaps' (which traders tend to believe get filled, often before a reversal in price) at 2900 and 3000.
Our US Equity Checklist has maintained a neutral position this month, suggesting that the market is likely to be technically driven with fundamentals are lacking any clear direction.
With our process presenting us with no clear reason to look to own equities and price approaching a potential upside extreme, it is worth reminding ourselves of the 'bigger picture’ provided by our other Checklists. Take our Market Risk Checklist, for example, which has maintained a clear negative bias for the past couple of months and currently sits at -2. This suggests that safe havens may be sought over risk assets (such as stocks), and works against the idea that stocks ought to continue higher with a local score of 0.
This negative bias is further supported by the recent price action in crude oil, which shows further evidence of traders pricing in a more severe recession than the equity market optimists. With the continuous contract breaking beneath $20, there is no support insight as ‘black gold’ trades at the lowest level in two decades.
Here you can see how our Checklist correctly anticipated the selloff in crude, having been negative for consecutive months, which doesn’t offer any hope for the bottom-pickers and macro bulls.
And just when you thought it was an obvious trade to long gold on a flight to safety, there might be one more mixed message to be found in here. Despite recovering from 1450 last month, further upside may be limited due to the deflationary headwinds of negative economic growth.
One of our members asked in this week’s Trading Club meeting whether gold would inevitably go up during a recession, but I explained how my personal preference would still be for the long-dated bond, particularly in a potential disinflationary, risk-off environment.
There are clearly conflicting signals coming from the stock market, against pretty much everything else. Time will tell how this all plays out, but rest assured that our Checklists and weekly Trading Club analysis will ensure that you are best prepared for the evolution in markets. With market drivers becoming increasingly complex in recent months it has never been more important to have a proven trading process at your disposal.
If you would like to join us for our full analysis including new insights each week or learn from the ground up with online tuition from Lex in our Million Dollar Traders online course, then join us now and take your financial knowledge to the next level!
Have a safe and pleasant weekend,
James Helliwell | Chief Investment Strategist
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