Its been a while since i updated here.
The wave C in risk off that was forecast by the Swiss team just didn’t materialize. The technical setup was clear with multiple death crosses and the exploding challenges in the repo market along side many key markets weakening considerably or slipping into a technical recession inc Germany, Italy etc.
But Central banks stepped up to the challenges once again as we have seen so many times before and their actions and guidance prevented the technical patterns from realizing their potential.
Instead we have the cycle back into cyclicals and this time with the emphasis on a weaker US$ and instead all yes are turning to an inflationary setup which means industrial commodities and energy. Both have been fairly unloved sectors, especially energy so the reversal has been quite impressive in these sectors. The jaw boning by the FED especially has been strong with Powell’s comments last week materially changing the guidance:
“I think we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns.”
You have to roll with the ever changing market dynamics and especially the central banks monetary measures. It was touch and go but ultimately, if structural damage to functioning markets is not a factor in their decision making, then their actions will alter market pricing outcomes. Gold continues to see good support though for as long as other securities see upside it seems its the market laggard rather than the alpha or + beta to the average.
To the immediate tech
US markets:
After breaking its 3028 all-time high and with further breakouts in key sectors (biotech, miners and oil) the SP500 is heading to an initial target projection of 3086 to 3109. Trading wise, with our daily momentum work reaching overbought extremes and short term sentiment heading into contrarian territory (low put/call ratio) the air is getting thin, where the SPX is moving into a short term trading top followed by a minor pullback into deeper November.
However, without any bigger divergences in medium-term indicators it is too early to call any bigger tactical tops, where it is still likely to see more selective strength into December but where the overall market momentum declining via potential real breakdowns in defensives (Utilities, Reits, Healthcare, Pharma, infrastructure), which should weigh on the SP500.
Tactical short-term resistance in the SP500 is 3086/3109. Support is at 3028/3000, where a re-test is likely into deeper November before the probability is to reach 3150 into December. For as long as policy makers are expanding balance sheets again cyclicals over defensives should remain the theme.
Within cyclicals there is also some rotation of the + Beta crown where its clear there is a rotation starting with breakouts in resource sectors (tracking Asia break out). The tactical sentiment climax of this rotation trade will only reach its peak point, when we see real selling pressure and technical breakdowns in defensives which is missing at present. Therefore tactically the setup is to buy any dips in cyclicals (and resource within cyclicals) into deeper November.
Cyclical models :
With the mid-October breakouts in US banks BKX ( GS Catch up candidate) and semiconductors SOXX (Nivida, Intel) as early cyclicals there is clear evidence that the suggested major mkt rotation into cyclicals has started. With the break of the SP500 3028 all-time high participants got the final confirmation that the bear C wave setup was broken and that the US markets (QQQ, DIA) but (IWM, NYSE still to breakout) are trading in a new selective bull market, where the index momentum should remain weak. Where tactically a weakish start into 2020 (later Q1 washout) but where the markets remains underlying bullish into initially Q2 with an SPX target 3240/3300.
European Markets:
Europe has been outperforming the US from its mid-August trading bottom on the back of the initial rally in
cyclicals (green shoots), and where over the last three weeks we have seen trend reversals in core cyclical sectors (SXAP, SX7P), with SXNP, SXIP and SXOP hitting new all-time highs, and where we see initial breakouts in major headline indices.
Again, with the OMX-30 (resource + Beta heavy) we have just the first major market in Europe breaking out to a multi-year high, and where the key breakout levels in the STOXX-600 are also not far. Short-term, Europe is increasingly overbought, and the Euro Stoxx is heading into resistance at 3700. For a potential pullback into deeper November we have support at 3550. Probability is to stay bullish cyclicals into December. (FTSE100 also resource heavy should be a European +beta on the narrative of the reflation trade).
FX Mkts:
In FX, the mid-October breakdown of the 2018 bull trend in the DX must be seen as ultimate evidence that the suggested major wave 5 for the USD top is in place. This de facto means that we see USD trading in the early stages of a bear market versus key pairs such as GBP, EUR, CHF, SEK, CAD and most of core Asia, and which on the macro side is a major game changer back into a reflation cycle.
Short-term, tactically the USD is oversold and we expect the DXY to be on its way into a minor trading low later this week for a bounce into deeper November but where into year-end expect more USD weakness.
Commodities: Gold remains in neutral position between $1557 and 1450 but where on the back of the weak USD and the breakout of Asian/EM the focus starts moving into the broader commodity complex with major bottoms forming in copper (COPX, ANTO, BHP, RIO), soft commodities and where in the energy complex (note XOP, LUKOIL) see a breakout in NatGas. (Note Gazprom)
With the break of the 2018 downtrend in the equally weighted CRB index we get a first significant breakout confirmation, which importantly will likely be the leading story for higher inflation into 2020!
Asia/EM: Asia and particularly China has been lagging the initial breakout in the MSCI EM. With yesterday’s rally, the number of breakouts in Asia is increasing with the Hang Seng breaking its 2019 bear trend, where we have a smaller breakout in the HSCEI and where the KOSPI is breaking out relative to the world. In the SSEC our focus in on the key resistance of 3048, where we would see a breakout as the starting point for a wave 3 rally.
Buy any dips in asia and em to expect more strength into December!
A few third party reports:
*DISCLAIMER – ANY COMMENTS ON LISTED SECURITIES ABOVE ARE SIMPLY A VIEW AND NOT UNDER ANY CIRCUMSTANCES A RECOMMENDATION TO BUY OR SELL. PLEASE SEEK ADVICE FROM A REGULATED FINANCIAL PROFESSIONAL FOR ANY INVESTMENT ADVICE.*