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Market Analysis

Has The US Stock Market Bottomed?

By | Market Analysis

On the 20th of May 2022, the S&P500 briefly fell into the official bear market territory, dropping over 20% from its all-time high. The S&P500 didn’t remain in the bear market territory for long and has continued to recover ever since. The jury is now out as to whether the US stock market has bottomed and will continue its bullish trend.

Today, we are digging deeper into the underlying mechanics of the US stock market and will analyse the recent price action of the NASDAQ and the DXY (US dollar Index).

Firstly, what is driving the market?

2022 has been all about interest rates, surging inflation and geo-politics. Since the FED pivoted from the “transitory” story, global stock markets have sold off heavily. This year, the interest on the US 10 year has risen sharply from roughly 1.5% to highs of 3.21%. As the market has re-adjusted to the year-end US interest rate projections, equity has rotated out of high tech, high growth stocks – which tend to perform well during periods of low-interest rates, and into safe-haven assets.

Notably, the USD or DXY has benefited majorly from that. The US Dollar index (DXY) has rallied over 10% from the start of 2022. As expected, the FED has taken an aggressive monetary policy tightening stance in an attempt to combat inflation. The FED hiked rates by 0.5%, its largest rate hike in 22 years. The market is expecting a series of interest rate hikes from the FED from June through to the end of the year, which is why the DXY has been a top-performing asset this year.

Currently the market consensus is a 100% chance of an interest rate hike in the next two FED meetings and roughly a 70% chance of an interest rate hike in September. Recently, there has been a series of concerning economic data points around the world which is raising the question as to whether the FED will stick to their guns, or take their foot off of the aggressive rate hike stance in September.

China has faced a prolonged period of Covid-19 lockdowns due to their no covid policy. This has resulted in China abandoning this year’s GDP growth rate target of 5.5%. Premier Li Keqiang has conceded that China’s economy is stalling at a dangerous rate and faces critical risks, as he instructed an army of officials from across the country to exhaust all measures to stabilise the economy. Manufacturing data is down indicating a slow down in the global demand for goods and services. As the saying goes, when China contracts the whole world feels it.

Secondly, the US reported a negative GDP growth rate of -1.5% for the last quarter, another quarter of negative GDP growth would signal an official recession. We are in a macro-economic environment of high inflation and a slowdown in productivity. With this in mind, and concerns of an economic slowdown, bets are growing that the FED may need to take a break from raising interest rates by September.

If this is the case, the equity market may have overextended to the downside as investors and traders would have priced in a more aggressive rate hike path into the year end. Whilst a slow down in the global economy could hurt individuals, the stock market appears to want and need negative data.

 

DXY Weekly Chart

The US dollar index is generally classed as a safe haven currency or asset, and tends to perform well during times of economic uncertainty, political tensions or war/conflict. The start of 2022 has been no different with the DXY surging to the upside reaching a 5 year high. Investors have rotated out of assets that performed well during the “easy money policy” from the Central Banks during the recovery from the Covid-19 pandemic and into the safe havens.

Since the negative economic data in May, the DXY has taken a sharp turn to the downside. A number of technical indicators are suggesting a major market cycle top is in place, and the next move on the US Dollar Index is to the downside. The weekly MACD is close to crossing over which has been a strong indicator of a major reversal previously. If investors are rotating out of the DXY due to the possibility of a lower year-end interest rate, the move to the downside in the stock market may also be over extended.

NASDAQ Weekly Chart

The start of 2022 has been very concerning, whilst the Covid-19 market crash felt more severe, the recent price action has continued to grind to the downside and has exceeded the Covid-19 market crash. Investors are now watching for signs of a possible bottom in the market. If the DXY has topped, and investors rotate out of the global currency reserve, there is a chance for investors to pick up stocks and equities at a 30% discount. The MACD and RSI readings on the weekly time frame are indicating a slow down in selling pressure. There has been a number of reversals on the NASDAQ when there were similar readings previously.

As an investor or trader, dips of this magnitude provide huge opportunities from an investment and trading standpoint. Whilst it is far too early to call a bottom, there are signs of selling exhaustion in the short term. It is no coincidence the DXY has reversed at the same time as risk assets like the NASDAQ. This is indicating a potential change in psychology and momentum in the market.

The recent market low at 11,500 will provide a key invalidation level for any bulls stepping back into the market. And on the DXY, a break above the most recent swing high at roughly 105.00 will provide a bearish invalidation level.

From a technical perspective, there needs to be a higher low on the NASDAQ and a lower high on the DXY to confirm a short term reversal.

Be fearful when others are greedy, and greedy when others are fearful – Warren Buffet 

By all means, the market is very fearful at the moment with recession headlines showing up all over the media. We are not suggesting to load up on all equities and stocks, but what we are suggesting is get yourself ready to take advantage of the huge discount in the market. The Trading Floor is ready to capitalise on any move higher on the NASDAQ, and are also watching the currency market closely for indications of a move lower on the DXY.

If you would like to discuss trading the financial markets in more detail, we have opened up FREE consultations where we are discussing potential opportunities across the US market.

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Don't Miss the FOMC & FED This Week

By | Market Analysis

FOMC and the FED – Make or break scenario for financial markets

 

Market Update – 17th March 2021

Over the past couple of weeks we have highlighted on a number of occasions the rise in bond yields, and the threat they pose to financial markets. 

Everyone knew at some point this year that bond yields would rise, so what has all the fuss been about? 

The move higher has not necessarily been the issue, it is the speed at which the interest on the yields has risen. The sharp rise in interest rates on the 10 year has resulted in volatility spilling over into risk assets. Especially tech growth stocks. Stocks like Tesla, Apple and Amazon have been hit the hardest, as they were the corporations that benefited the most during the economic downturn. 

The rise in interest rates on bond yields signals a strengthening of the US economy. Markets are beginning to price in an interest rate rise or a bond tapering (central bank tightening) from the FED a lot sooner rather than later. Growth stocks surged throughout 2020 and early 2021 anticipating further stimulus and record low-interest rates for the foreseeable future. However, this could be coming to an end…

“The steepening yield curve reflects that returns on long-term bonds are growing faster than the return on short-term bonds, signalling economic optimism. This indicates the spread between short-term and long-term interest rates has widened. When a yield curve is steep, the market is pricing in central bank tightening. This means that the market believes the central bank will increase short-term rates, eventually creating a normal yield curve at higher short term rates.” 

 

Will rates continue rising?

 

Back in 2016, the FED announced they were reducing the pace of its purchases of treasury bonds (bond tapering), to reduce the amount of money it was feeding into the economy. The market did NOT like this, resulting in equties sinking lower. This is now known as the 2016 taper tantrum.  A similar scenario is potentially on the cards at some point in the near future. The question is will it occur during the next meeting. 

FOMC DOT PLOT & Interest Rate decision

The FED will release their new economic and interest rate forecast, which could show FED officials expectations to raise interest rates by 2023 which is sooner than the market expected, 2024. If so, expect a bearish move across risk assets and a bullish move on the USD.

Potential Outcomes

Scenario 1: Potential Dovish Outcome (weaker USD)

FED members signal yield curve control intervention. This is where the FED will purchase bonds on the longer end of the yield curve to drive interest rates lower. 

DOT Plot remains unchanged. This is where FED members signal their opinion on interest rates over the next two/three years. If this remains unchanged expect a weaker USD. Currently, the DOT plot median is a possible rate hike by 2024.

Scenario 2: Potential Hawkish Outcome (stronger USD)

If FED Chair Jerome Powell has no verbal intervention on the bond yields. 

If the DOT PLOT median interest rate change moves closer, from 2024 to 2023. 

No announcement of yield curve control.

USD INDEX – Daily Charts

There are two key levels to keep a close eye on. A close beneath the 91.36 support will indicate a continuation to the downside. This may occur if the FED cools inflation and interest rate fears. However, a breakout above the new resistance at 92.70 will indicate a continuation to the upside. This will occur if the FED signals an interest rate hike sooner than market consensus.

 

As always we will be looking to capitalise on the volatility in the trading floor later this evening! If you have any questions let us know in the trading floor live chat.

Bull Trap on the US Stock Market...

By | Market Analysis

Are we looking at a BULL TRAP on the US stock market?

Isn’t it bizarre how the US stock market is trading at record highs yet there are over 12 million US citizens unemployed? More major retailers have filed for bankruptcy in the first nine months of this year compared to the whole of 2019.

Furthermore, US mortgage delinquencies have jumped by nearly 4% which is the largest jump since the MBA’s (Mortgage Bankers Association) survey began. An estimated 4.2 million homeowners were on forbearance plans, as of June 28th.

You may have heard the saying, there is a disconnect between the economy and the stock market, and you would be correct in agreeing with the statement.

Markets are trading at record highs based on hopes of a second stimulus package. The mass stimulus from the FED and US government is resulting in a devaluation of the USD. The US printed more money in one month than in two centuries.

We are now questioning the strength of the recent recovery in the US stock market. 

Are we in a counter-rally/bull trap?

SP500 – Daily Charts

The SP500 is showing a rising channel formation/bear flag, keep in mind these ALWAYS break at some point. The new high is also setting up a potential bearish divergence on the RSI. The bearish divergence is generally what we look for when trading reversal opportunities.

DOW JONES – Daily Charts

There is a similar story being painted on the Dow Jones. A possible bearish divergence setting up along with a bear flag structure. Retail traders are being brought into the market on hopes of more stimulus. Technical patterns are always broken at some point, what we tend to find initially is a move higher beyond what the market is expecting. Which results in capitulation and a breakdown. Classic bull trap scenario.

The question we have to ask is how high will this go before the opportunity presents itself.

Next week there is a blockbuster week!

VIX Options/ Futures expiration on the 21st October

US Government vote on the next stimulus bill.

Presidential debate on the 22nd October

 

Firstly, the VIX is a measure of volatility. Leading into the expiration date traders will be looking to sell their positions or face cash delivery. This can increase volatility on the day. The market, which is hanging on stimulus hopes, will find out on Thursday if they receive any stimulus prior to the US elections and to top it all off, President Trump and Joe Biden face off again for another comical viewing.

The stimulus will have a direct impact on the USD and US indices.

DXY Index

We have been tracking the USD reversal pattern for some time, as you all have seen previous analysis.

There has been an inverted head and shoulders formation at the bottom of a 5 wave structure. The DXY is now setting up a potential bull flag structure. There is a clear inverse correlation between the US stock market and the DXY.

If the stimulus talks breakdown, we could see an explosion on the VIX, consequently pushing traders into the USD and sell US indices.

The technicals are there for everyone to see.

We just need the catalyst to start the movement. Technicals are ALWAYS broken, it is just a question of when.

Our sole focus in the trading floor is to take advantage of these setups over the coming week!

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