Computer Centre, US, 1966
an early AI in action, for which the EU has just seen fit to bring out sweeping laws against. Horse. Bolted.
In this issue
The Fed and ECB
What US unemployment rates are before a recession
Short trade on Russell 2000 slowly setting up
Risk Index
Under 50 = accumulate, over 70 = defensive, over 90 = distribute
The Risk Index is a combined read of the trends of 68 intermarket spreads and indicators, from credit spreads in the US to car sales in Spain.
Yes, it’s a broken record. Who told you trading was exciting? Highly likely that there will be a 20% correction within the next 6 months, but shorter-term indicators are still failing to show extremes.
Any key inputs?
Wednesday - FOMC rate decision
Thursday - ECB rate decision
Friday - BoJ rate decision
Canada gave a ‘mini-surprise’ hike last week. Not that it did CAD much good. The interpretation of Fed and ECB messaging this week will play a crucial role in how deep the next turndown is in equities.
Scenario 1
They remain stubbornly hawkish, raise, and/or indicate the potential to raise further. This makes it more likely that equities will make new lows over the next 6 months.
US 2 year yield (thick line) and 3 month yield (thin line) tells us that a hawkish Fed is still expected but rates are expected to be lower in a few years. A flip from 2022.
Similar picture on German yields. The further these spreads widen, the worse the correction will be when CBs have to quickly reverse course. They only move quickly once they have broken something.
Scenario 2
They come across as dovish, paying attention to the obvious weakening in economic data. Markets listen to the dovishness and sell-off. This would be a great dip to buy, with the potential increase of liquidity being laid out ahead and a soft landing more likely.
US unemployment rate (top) and Continuing Claims alongside their 4-week average (the blue line perilously close to trending up) bottom. This is the kind of longer term indicator that the Fed pays attention to.
Note the blue horizontal line on the top chart - around 4.9% unemployment. Recessions usually start only after unemployment is below this threshold.
It always looks best at the top.
Whether they go for scenario one or two depends on how scared of inflation they continue to be.
In either case….
Don’t be a bear or a bull
- be a trader
It’s not a clamour yet, but there’s an increasing number of pundits explaining why it’s obvious that the market is going higher because of x, y and z.
If we keep in mind that all humans are dumb, unable to keep more than a few bits of information in their working memory at once, any certainty is likely to be wrong; we simply don’t have the ability to be completely right (and wouldn’t even know if we were).
As a trader, we can wait until a ‘certainty’ is being shouted from the rooftops and take that as a solid contrarian indicator.
Not a clamour. Yet.
The slow setup
So, sentiment isn’t giving us a signal yet. But it’s been a long wait, and we’re itchy on the trigger. Personally, I was out of the Nasdaq long and NZDCAD short a few weeks ago and have been flat on short-term trades since.
So, I need to watch. I’m not taking a shot at everything that pops its head up just to get some action.
So far, that’s been an easy job, as nothing has lined up.
Nasdaq weekly - a pop above 15000 looks likely
SPX weekly - it’s in quite a nice spot, just tipping above the 100 WMA and in the previous breakdown zone again. But overall it isn’t extended enough over the short term to warrant fading the upside momentum.
‘Stocks above MAs’ indicators are also not shouting for a short. Yes, stocks above 20MA (above) is in the right spot.
But stocks above 50MAs could still do with pushing higher. Particularly considering sentiment isn’t one-sided yet.
These levels and indicators could line up soon, and there is one index that is setting up well….
The Russell 2k. It has been one of the weakest indices on this bounce so gets a tick in the box when choosing what to short. The weekly here shows another week of strength would get it kicking into the upper bound of recent range, which is also the 100WMA zone, 50% retracement of 2022 price action and 2020 close/ 2021 open level. That’s a nice bit of confluence.
Add all that to overall extention in the market + a bullish certainty and we’ve got ourselves a trade.
Not yet. But let get the search lights on for any excessive sentiment, as displayed by a silly day or so of equity price gains.
Quote to Self
"History shows that where ethics and economics come into conflict, victory is always with economics."
~ B.R. Ambedkar ~
At a time when we are swinging from one gut reaction (environmentalism) to the next (AI scepticism), the countries or conglomerates that don’t ignore this are likely to become the next world leaders.
Have a great week.