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Stock Market Roll Over Risk to New highs in S&P 500

Stock-Markets / Stock Markets 2019 Oct 16, 2019 - 08:19 AM GMT



As global risks continue to rise and collect, equity markets rise as wave of bond market flows lift the risk markets globally. As the old saying goes, buy equities when there is blood on the streets. With Turkey fighting in Syria, risks are tilted to the downside for equity markets.

we remain in a fragile period where the possibility of a phased trade deal may not be enough to bring buyers into the markets. With earnings season due to start next week, anxious investors will soon have even more to worry about.

We analyse some charts and key fundamental data points.

ECB Balance Sheet

China Trade data

China has been powerhouse of the world economy. Both exports and imports have fallen. This is bad news for the rest of the world esp the US which is tied strongly to the Chinese exports to keep its economy buzzing at low cost. US companies operating costs will rise over 20% if China exports start to sowdown as seen above.

Oil Short Seller

Speculators are climbing into Oil shorts. The slowing world economy, US Oil has been pumping at record pace and Chinese growth worries are all potential triggers for a 20% correction in Oil prices. Geo political risks have been keeping prices high.

Slowdown in Industrial Production

Industrial production in EU has seen a dramatic fall in the last 4 quarters. Mainly driven by the export fall in Germany automobile sector.

Wholesale Prices in Germany

The mainstay of EU economy, German economy, is under severe pressure. Prices are falling of the cliff. The demand destruction is evident in the above chart.

Oil Markets

Iranian tanker was attacked last week and thus the tension is still very high. Look at the normally docile shipping rate charts below...

Oil supertanker rates are skyrocketing after the latest Middle East attack

Trading charts

Dollar Index

Dollar index is at key support 98.5. The index is now very much in the strongest part of its uptrend and we will see a significant surge higher into 103. The downside is limited. The hard brexit risk is very much an active threat. China - US tensions has not been solved. Turkish offensive have led to further increase demand for safe haven flows. Given the risks, dollar index will be well bid.

VIX: Fear index

VIX has again fallen to 16 from 19x. However the traditional 12 -13 range may not return. We see 16-24 as likely range in next 6 months. If VIX goes above 20, we will, see major risk to equity markets.  

Market Breadth

A bearish signal triggered in small-caps as the S&P 600 %Above 200-day EMA ($GT200SML) moved below 40% and reversed the bullish signal from early September. All told, six of the nine breadth indicators are on active bullish signals and three are on active bearish signals. Large-caps continue to lead the charge with all three signals bullish.

GBPUSD pushed higher to 1.2690. The level is near the 200 DMA. The move capped a two day rise of over +400 pips. The move was largely on account of short covering and we do not see the move being sustainable.

GBP/AUD too rose from 1,8250 to 1.8680. Prices have since eased down. Any positive news on US-China trade deal will first affect this pair before any other as both are dealing with significant fundamental issues.

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