If the warning signals are right, buy-in opportunities appear!?

If the warning signals are right, buy-in opportunities appear!?

16. elokuuta 2021 - Carlsquare

Trading on Friday 13 August remained summery, despite the news flow picking up. The news that consumer confidence in the US had suddenly and unexpectedly fallen to historically low levels took up most of the attention.

The key takeaway from the report is that the plunge in consumer sentiment wasn't just related to concerns about the Covid Delta variant. It was linked to all aspects of the economy, the report said, from personal finances to prospects for the economy, including inflation and unemployment. Moreover, the deteriorating sentiment was seen across income, age, and education subgroups, and observed across all regions of the United States.

US Consumer Confidence from the 1960s to 2021

Above is the time series from the 1960s. To find the corresponding low levels, one must go back to the financial crisis of 2008-2010. Consumer confidence in the US is now back at the same low levels as when the Covid 19 crisis was at its deepest in April 2020. This is happening at the same time as the stock market is breaking new records!

So where does this strange market come from? Our readers that have been with us for a longer time may be tired of the answer. It is, of course, the support purchases by central banks that are having an impact.

Federal Reserve, Total Assets versus S&P500 index from January 2008 to August 2021

Each coin has two side. In this case it´s the US national debt that´s skyrocketing. In the US, the government cannot borrow as much as it wants without a congressional resolution. This creates room for various political processes in the US where different groups take advantage of the situation to score points, which can spill over to turmoil in the markets. Sometimes government agencies are shut down when salaries cannot be paid, but so far, all crises have eventually been resolved.

Fed members say it´s time to withdraw support now that the economy is improving. However, this is mostly the test balloon ahead of the Fed´s meeting in Jackson Hole on August 26-28 where Fed Chief Jerome Powell is expected to give a keynote speech on future Fed policy. He will say that support will be reduced as the economy improves. Whatever words he chooses will be weighed on the scale of gold. But the interesting thing is not what he says but how the market reacts to his words. Expect it to take a few days for the effect to sink in. Note also that he is unlikely to say that subsidies should be removed or that the Fed´s balance sheet should be reduced by paying off the US national debt. This is completely implausible that it will happen any time soon. It is only a question how much to reduce the current support measures that is in focus. The stock market can continue to count on support from the Fed for the foreseeable future.

Another aspect of the generous aid and loan policy is that poverty is falling rapidly in the US. According to the New York Times, the change has been the fastest ever, measured on a three-year average.

This is of course gratifying. But say the joy that lasts forever. Many of all the US aid programs expire in September and it is unclear which will be extended.

It is possible to make fun of this as a new kind of socialism practiced by the US, under the leadership of its central bank, the Fed. All the huge subsidies being handed out lead to a kind of neo-socialism where the state pumps out money in subsidies and where the loans are accumulated by the Fed. GDP rises, inflation is kept below the “average 2% level” and the stock market reaches new record highs.

But in practice, it means a gradual transfer of power from elected assemblies to central banks.

In the markets, this is not a big issue. Those who need to worry most are the people in the fixed income markets who will lose their jobs when trading disappears, as has happened in Japan. But those who cling to this guild seem happy to have a buyer who will purchase everything they are served.

In the stock market, there is not much interest either. All the bond buybacks mean that the money that would otherwise go into the bond market, instead goes into the equity market.

As usual, we listen to all the buzz in the market, but act on the charts.

The US 10-year government bond yield, from 7 January to 13 August 2021

In the US, interest rates reacted sharply with the 10-year Treasury yield falling by five percentage points to 1.3% and staying just above the MA200 on the weak consumer data.

The US 10-year government bond yield, five-year graph

Note: Past performance is not a reliable indicator of future results.

With falling interest rates, the USD was sold off. Note in the chart below how the EUR/USD bounced nicely at the previous low from late March 2021. With a continued weakness in the USD (strength in the currency pair EUR/USD), there could be a possible boost to the commodity complex with copper and oil in the front seat, but also for precious metals.

EUR/USD from 11 November 2020 to 13 August 2021

As can be seen in the weekly five-year graph below, momentum is still falling. Thus, it is important that this turnaround in the daily graph for EUR/USD is confirmed.

EUR/USD, weekly five-year graph

Note: Past performance is not a reliable indicator of future results.

On the other hand, gold has already started to move. Is Fibonacci 50 right below of the 1 800 USD per ounce-level next?

Gold price graph from 13 January to 13 August 2021

Gold price, weekly five-year graph

Note: Past performance is not a reliable indicator of future results.

Given a declining USD, the EUR rises. Note the support from the March-April lows. A rising EUR and a falling USD could fuel the DAX index out of a long consolidation phase. However, note how a bearish shooting star candle stick was created during Friday’s trading:

DAX Index graph from 23 October to 13 August 2021

Nevertheless, momentum is still rising in the daily graph…but not in the five-year weekly graph below. This can be viewed as a warning signal. In the daily graph. DAX has not been trading below MA100 since October. Perhaps a dip towards MA100 could provide a good buy-in opportunity.

DAX Index, five-year graph

Note: Past performance is not a reliable indicator of future results.

One of our main tools in recent years has been the junk bond market, where investors buy risk far out on the risk curve to get a fixed return. At the peak of the crisis during Covid 19, the Fed also started buying into this market, which clearly had a positive impact. However, in June 2021, the Fed decided to unwind these holdings, which seems to have depressed prices and created a discrepancy with the S&P500 index. Sooner or later, this selling pressure in HYG will fade. When so is the case, we are happy to get back an instrument that is unaffected by the intervention from the Fed.

HYG graph from 22 October to 13 August 2021

HYG, weekly five-year graph

Note: Past performance is not a reliable indicator of future results.

The S&P500 index continues to rise above EMA9 as well as MA20. However, note the small bearish rising wedge that is being created. These could end with a break to the downside given there is a proper trigger. The market is more than ripe for a drop about 10-20% but for this to be triggered, some sort of unrest must first be created in the market. Instead, so far MA50 has been good buy-in opportunities.

S&P500 index graph from 6 January to 13 August 2021

S&P 500 index, weekly five-year graph

Note: Past performance is not a reliable indicator of future results.

The VIX, which shows the option´s market’s pricing of risk over the next 30 days, is starting to fall towards the lower Bollinger Band. This is usually a level where it pays to buy protection. In other words, VIX calls for a larger move in the stock market assuming a reversion to the mean.

VIX graph from 15 February to 13 August 2021

Nasdaq is like S&P 500 trading in a bearish rising wedge formation. In case of a break to the downside, MA50 is the target level that may also provide an interesting level to buy-in?! However, MACD is falling so be careful out there if trying to catch any falling knives.

Nasdaq graph from 6 January to 13 August 2021

In the weekly five-year graph below, the two last weeks has ended up with two dojis implying high uncertainty.

Nasdaq, weekly five-year graph

Note: Past performance is not a reliable indicator of future results.

The Apple stock tried to break out on the upside of a neutral wedge formation on Friday 13 August but failed. Momentum is also falling, as shown by MACD.

Apple share price graph from 6 January to 13 August 2021

Apple, weekly five-year share price graph

Note: Past performance is not a reliable indicator of future results.

On a positive note, the Microsoft share managed to set a new all-time-high on Friday. But again, momentum is falling increasing the odds for a strong upwards break-away:

Microsoft share price graph from 6 January to 13 August 2021

Microsoft, weekly five-year share price graph

Note: Past performance is not a reliable indicator of future results.

When speaking of all-time highs, the OMXS30 index also managed to set one on Friday even though marginally. Volatility is low but as shown in the graph below, the index is trading in a bearish rising wedge formation. If the wedge breaks on the downside, MA50 may again serve as an opportunity to buy-in.

OMXS30 index graph from 6 January to 13 August 2021

OMXS30 index, weekly five-year graph

Note: Past performance is not a reliable indicator of future results.

Full name for abbreviations used in previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence

Important notice

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.

2.12.2021 5:51:29

 

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