Outlook on the US equities and the current divergences
I want to give my outlook on the current market conditions, with the focus on the US equities market as it draws a lot of attention these days.
During May and the beginning of June, we’ve seen an unprecedented “comeback” from the abyss caused by February-March – arguably the fastest in the history of S&P500 crash recoveries. Astonishingly, the market managed to reach the pre-pandemic levels, being just under 5% from the all-time highs.
As the last week was about to end the steep surge ran out of steam which resulted in a sharp decline of 6% making June 11 the most significant one-day drop since March and its potential bottom of the crash.
In these highly volatile and sentiment-sensitive times, how do we interpret this one-day sharp decline? Well, two main narratives are wandering among investors: the tactical narrative and the retail narrative. The tactical narrative says that investors who managed to buy near the March bottom and during the rally that proceeded, cover their positions securing the profits before February resistance and the all-time highs. In this case, it’s an entirely healthy pullback that totals less than 25% of the rally since it has started on March 24. The narrative came up as the result of the hopes for V-shaped recovery spread by economists and surveys. On the contrary, the retail narrative means that retail traders are betting up against the seem-to-be recovery considering it to be the beginning of the new downward swing and the continuation of the bear market.
Let’s zoom out and see what fundamental picture can tell us. We’ve seen a massive rebound in the US labour market with Non-farm Employment change from over twenty million unemployed in May to added new two and a half million jobs in June. The overall Unemployment rate also decreased to 13.3% from 14.7% in May, performing much better than expected.
With the newest data from Manufacturing and Non-Manufacturing Purchase Managers indexes showing the actual number better than previous, we can conclude the upbeat sentiment of the US businesses, as the Non-Manufacturing index even posted higher than expected results. From the side of the consumers, according to the most recent update from the University of Michigan’s Consumer Sentiment index, the Preliminary index data was released better than expected and higher than the previous number overall (78.9 actual vs 72.3 previous). Thereby, it’s quite obvious that both businesses and consumers have high hopes on the soon economic recovery. These sentiments are understandable due to the general reopening of the US economy with just a few states reopening regionally. While the decisions of the policymakers directed unto “returning to normal”, we shouldn’t forget that The US remains one of the countries with the highest rate of new COVID-19 confirmed cases. Most of the pandemics had the second wave and the common pandemic duration expectations among the scientists lean towards two years. The aggressive reopening of the economy in case of The US is more likely to be caused by the negative economic consequences of the shutdown than actual overcoming virus spread. In comparison, as European countries are reopening the curve of their COVID-19 confirmed cases (see Germany, Spain, Italy and France) is flattening compared to the US, so the decisions of the European policymakers are more grounded.
Looking through another dimension of the current economic downturn puzzle, the correlated assets must be considered as well. Curiously enough there is a clear divergence (marked with blue curved arrows) among S&P500 versus 10-year bonds (negatively correlated), WTI Crude Oil (positively correlated) and gold(negatively correlated) prices on June 8 (marked with the blue vertical line). As we can see, while bonds and oil generally are closely correlated with the equities, on June 8th bonds had the first positive day for the last week, and Crude had the first negative one, while equities still managed to close higher. Oil being insanely volatile for the last several months could be one of the driving forces spilling over the volatility unto the equity markets. As Crude managed to correct over 50% of the recent sell-off and reach the mirror resistance area formed around $40(the grey area), it wouldn’t be surprising to see the asset reverse or at least consolidate nearby the resistance. If equities at least anyhow look up to the oil markets these days, this situation must’ve alerted the fast S&P500 growth of the upcoming downward pressure, and it seems like it did on June 8. The following day marked the beginning of the current down move in the stock market. I’ll keep monitoring oil for the next inflexion points.
Since long ago, on Wall Street, they say that the bond market is smarter than the stock market. Let’s see again what happened on June 8 in the bond market. As mentioned previously, the bond market closed higher while equities continued rallying for one more day (marked with the blue vertical line). The bond market has been forming the ascending triangle (marked with the black lines) since the beginning of March consolidating around 139 (marked as the grey area) while the equities continued the rally. That might imply that the “smart money” doesn’t see what the stock market was trying to show us as the objective economic recovery. Joining the party of oil and bonds divergencies, since the middle of March, gold has also been consolidating near the critical $1700 resistance level (marked as the grey area) signaling that the risk averting investors have a contrarian stance regarding the recent equities rally.
All in all, as the pandemic problem is ongoing and projected to be so at least until 2021, a lot of downside risk must be considered for the current medium-long term bulls. However, we know that “Markets can remain irrational longer than you can remain solvent”. In the short-term, there might continue to appear some upside momentum opportunities, especially in case of the equities closing above June highs or eventually the all-time highs. Undoubtedly, following the “retail narrative”, we may witness the inflow of swing and intraday short-sellers activating these days, as there is a significant downside room for a steep sell-off all the way to March lows if not lower. As I’m writing this article, the S&P500 breaks last week’s lows signaling another volatile week ahead.
With the US dollar index remaining negatively correlated since the bottom of the crash in March (grey area chart), and showing the signs of the rebound from 96 long-term support, we may see US dollar recovery in the upcoming weeks, but that’s another story.😊
Have a great week and stay safe, everyone!
During May and the beginning of June, we’ve seen an unprecedented “comeback” from the abyss caused by February-March – arguably the fastest in the history of S&P500 crash recoveries. Astonishingly, the market managed to reach the pre-pandemic levels, being just under 5% from the all-time highs.
As the last week was about to end the steep surge ran out of steam which resulted in a sharp decline of 6% making June 11 the most significant one-day drop since March and its potential bottom of the crash.
In these highly volatile and sentiment-sensitive times, how do we interpret this one-day sharp decline? Well, two main narratives are wandering among investors: the tactical narrative and the retail narrative. The tactical narrative says that investors who managed to buy near the March bottom and during the rally that proceeded, cover their positions securing the profits before February resistance and the all-time highs. In this case, it’s an entirely healthy pullback that totals less than 25% of the rally since it has started on March 24. The narrative came up as the result of the hopes for V-shaped recovery spread by economists and surveys. On the contrary, the retail narrative means that retail traders are betting up against the seem-to-be recovery considering it to be the beginning of the new downward swing and the continuation of the bear market.
Let’s zoom out and see what fundamental picture can tell us. We’ve seen a massive rebound in the US labour market with Non-farm Employment change from over twenty million unemployed in May to added new two and a half million jobs in June. The overall Unemployment rate also decreased to 13.3% from 14.7% in May, performing much better than expected.
With the newest data from Manufacturing and Non-Manufacturing Purchase Managers indexes showing the actual number better than previous, we can conclude the upbeat sentiment of the US businesses, as the Non-Manufacturing index even posted higher than expected results. From the side of the consumers, according to the most recent update from the University of Michigan’s Consumer Sentiment index, the Preliminary index data was released better than expected and higher than the previous number overall (78.9 actual vs 72.3 previous). Thereby, it’s quite obvious that both businesses and consumers have high hopes on the soon economic recovery. These sentiments are understandable due to the general reopening of the US economy with just a few states reopening regionally. While the decisions of the policymakers directed unto “returning to normal”, we shouldn’t forget that The US remains one of the countries with the highest rate of new COVID-19 confirmed cases. Most of the pandemics had the second wave and the common pandemic duration expectations among the scientists lean towards two years. The aggressive reopening of the economy in case of The US is more likely to be caused by the negative economic consequences of the shutdown than actual overcoming virus spread. In comparison, as European countries are reopening the curve of their COVID-19 confirmed cases (see Germany, Spain, Italy and France) is flattening compared to the US, so the decisions of the European policymakers are more grounded.
Looking through another dimension of the current economic downturn puzzle, the correlated assets must be considered as well. Curiously enough there is a clear divergence (marked with blue curved arrows) among S&P500 versus 10-year bonds (negatively correlated), WTI Crude Oil (positively correlated) and gold(negatively correlated) prices on June 8 (marked with the blue vertical line). As we can see, while bonds and oil generally are closely correlated with the equities, on June 8th bonds had the first positive day for the last week, and Crude had the first negative one, while equities still managed to close higher. Oil being insanely volatile for the last several months could be one of the driving forces spilling over the volatility unto the equity markets. As Crude managed to correct over 50% of the recent sell-off and reach the mirror resistance area formed around $40(the grey area), it wouldn’t be surprising to see the asset reverse or at least consolidate nearby the resistance. If equities at least anyhow look up to the oil markets these days, this situation must’ve alerted the fast S&P500 growth of the upcoming downward pressure, and it seems like it did on June 8. The following day marked the beginning of the current down move in the stock market. I’ll keep monitoring oil for the next inflexion points.
Since long ago, on Wall Street, they say that the bond market is smarter than the stock market. Let’s see again what happened on June 8 in the bond market. As mentioned previously, the bond market closed higher while equities continued rallying for one more day (marked with the blue vertical line). The bond market has been forming the ascending triangle (marked with the black lines) since the beginning of March consolidating around 139 (marked as the grey area) while the equities continued the rally. That might imply that the “smart money” doesn’t see what the stock market was trying to show us as the objective economic recovery. Joining the party of oil and bonds divergencies, since the middle of March, gold has also been consolidating near the critical $1700 resistance level (marked as the grey area) signaling that the risk averting investors have a contrarian stance regarding the recent equities rally.
All in all, as the pandemic problem is ongoing and projected to be so at least until 2021, a lot of downside risk must be considered for the current medium-long term bulls. However, we know that “Markets can remain irrational longer than you can remain solvent”. In the short-term, there might continue to appear some upside momentum opportunities, especially in case of the equities closing above June highs or eventually the all-time highs. Undoubtedly, following the “retail narrative”, we may witness the inflow of swing and intraday short-sellers activating these days, as there is a significant downside room for a steep sell-off all the way to March lows if not lower. As I’m writing this article, the S&P500 breaks last week’s lows signaling another volatile week ahead.
With the US dollar index remaining negatively correlated since the bottom of the crash in March (grey area chart), and showing the signs of the rebound from 96 long-term support, we may see US dollar recovery in the upcoming weeks, but that’s another story.😊
Have a great week and stay safe, everyone!