*Discussing the technical charts and fundamentals for the major stock market indices*
Welcome back to the blog! I hope you had a great weekend and you are ready to get stuck in to the week and do something great. I have been working/trading from my home office for almost 3 years now and I still sometimes find myself procrastinating and slacking off. I am not a big fan of the motivation gurus you see all over the internet and social media because they make money by telling you common sense and obvious things, here is a top tip I have found to help with productivity.
Make a daily and weekly “to-do” list with 3 things you want to accomplish this week and each morning write down something you want to accomplish that day. Then do it! It doesn’t matter how big or how small the task might be, what matters is that you tell yourself to do something and you do it. This should break any procrastination routines you might be currently stuck in and push you back in to productivity.
Now let’s get right in to it and look at 3 major stock market indices to get a handle on what is happening in the equities markets right now.
Much like the Nasdaq, the S&P500 has now made new all time highs this month and has therefore officially exited a bear market which was very short lived. In less than 6 months the SPX has dropped more than 35% in value from the highs in February 2020 and then fully recovered and gained more than 55% in value to the current highs. This just proves how volatile the markets have been this year.
Looking at the larger timeframe chart above we can see that price has continued on a long term bullish trend riding the 50EMA and 200EMA along the way with both moving averages aligned for a bullish trend. The only times the EMA’s have crossed in the last 20 years were back in 2001 when the Dotcom bubble burst and in 2008 during the financial crisis. During the coronavirus pandemic price broke below both EMA’s but they are yet to cross each other and this could be a technical analysis point to remember for when betting on a larger correction or market crash.
Let’s look at another technical indicator… the RSI.
The chart above shows the weekly price for the SPX but I have applied the standard 14 period RSI. A historically used indicator for dictating overbought and oversold conditions in the markets. According to the RSI this stock market is NOT overbought yet. Yes there are arguments that stocks are overvalued vs the current economic situation but they are not overbought. There is a distinct difference.
Stocks can be overvalued but if fixed income is paying nothing and global real rates are all heading negative (and this is the case) then there is no better alternative. Therefore there is still people willing to buy stocks at these levels and that means they are not “overbought”.
Dow Jones Industrial Average.
The Dow Jones is much more interesting right now when you compare it to the two other US stock market indices. Unlike the S&P500 and the Nasdaq, the Dow is still yet to fully recover its 2020 losses and make new all time highs.
The main reason for this is that the Dow Jones typically contains industrial and manufacturing stocks and not technology stocks. in the past 6 months, the recovery has been lead by tech stocks with them being responsible a large proportion of growth compared to other industries. The Nasdaq index is tech heavy and has therefore benefitted the most. Tech stocks have not been effected by the coronavirus pandemic destroying demand and instead benefited with more of us working from home, online shopping and streaming/playing games.
A lot of the recent stock market recovery can be attributed to two things. The first is that there is no better alternative. As I mentioned earlier, real rates are negative or low across the globe now and that is a fact of life going forward.
The charts above show the 5yr and 20yr real rates on US government bonds. They are both now fairly below zero and look likely to remain there for some time. This means fixed income is not a good investment when looking for returns and even commodities price are beginning to flatten out.
Crude oil has recovered from its negative prices in April but has now spent the last 3 months sat stagnant at or around the $40bbl price mark. This should be expected, fundamentally not a lot has changed and we are still experiencing a huge lack of demand with air travel demand at 1/4 of what it was prior to the coronavirus pandemic. Commodities are unlikely to make huge returns for the foreseeable future which, along with negative rates means investors are looking to stocks to generate returns.
The second reason for the stock market is money supply and aggressive fiscal and monetary policy stimulus from central banks and governments. I will again use the U.S. markets and the Fed to explain this. Let’s look at the M2 money supply chart first.
The Fed have created an environment where they essentially are now saying they will continue to support the economy for as long as is necessary and there is no limit to the amount they will spend. This does bring confidence in to the markets and allows investors to buy stocks at any price level because they know the Fed will buy them back when they choose to sell.
The aggressive stimulus and financial support packages handed out by the U.S government and central bank has had to come from somewhere and a good portion of that has been money printing. As you can see on the chart above, from March 2020 M2 money supply has been increasing dramatically with almost $3 trillion extra dollars being introduced into the economy.
Yes, that is correct, the chart above is listed in billions of dollars. So the current level of M2 money supply, which is a M2 is a broad measure of the money supply that includes cash, checking deposits, and easily convertible near money, is 18326 billion or 18.326 trillion dollars.
This should mean inflation and although I have previously argued that the strength of the US dollar is often undervalued, in recent weeks the dollar has began to weaken slightly against other currencies but not by as much as many expected. The chart below shows the Bloomberg Dollar Index (BBDXY).
As you can see, despite increasing US dollar money supply by $3 trillion, the Dollar is still no where near the lows of 2018. This is because all central banks are also printing money so currency devaluation becomes irrelevant and almost normal.
You can read more about the US dollar index and my thoughts on the Dollar itself by clicking on the links to previous blog posts below.
FTSE 100 Index.
The FTSE100 index is the only stock market index I still hold short positions on and I am still actively trading. As you can see on the chart above, it looks completely different to the US stock market indices.
Whereas the S&P500 and Dow Jones have spent the last 20 years in a consistent and reliable bullish trend, the FTSE has basically been sideways and range bound. Multiple crosses of the 50EMA and 200EMA have occurred and this has weighed heavily on long term returns compared to other indices.
Using the same RSI indicator on the weekly price chart, you can see the FTSE index is no where near being overbought right now but it hasn’t been typically or officially overbought since 2016. It was not considered overbought when it finally made new all time highs back in 2018.
Although the UK government and the Bank of England have been active in their response to the coronavirus pandemic with lots of monetary and fiscal stimulus, it has been no where near the levels seen in the USA. The Bank of England are much less active with their participation in the stock markets. The chart below shows the M2 money supply for the United Kingdom.
Although money supply has increased a lot since March this year, the comparison against the US shows some shocking differences. The UK chart is using units in millions NOT billions! The UK M2 money supply has increased by approximately 300 billion since January 2020 compared to a 3 trillion increase in the US. That’s a big difference.
The UK stock market index is also not as tech heavy as the US stock market indices and this shows. As a much smaller economy that has already been struggling to make new stock market highs and has been plagued by Brexit and EU dramas for the past 3 years, it is clear to see that the FTSE is struggling against its overseas alternatives.
Price is range bound on the intraday price chart as well as the higher timeframe weekly price chart that I have already shown you. I am shorting from the highs at around 6300 where price has continued to show resistance and bounce from. I am wanting to see a clear and continued break of the 6000 level next but it is continuing to show support. If that level does break I believe we will see a lot of downside on this stock Index and price could quite easily reach the yearly lows around 5000.
You can see my previous blog post explaining my analysis of the FTSE100 index by clicking on the link below.
This weeks financial market fundamentals.
There is some high impact data coming out this week, the bulk of which is the GDP data for the U.S., Canada and Switzerland. I can see the U.S. data moving stocks again because there is such a large difference between the forecast data for Q2 and the actual data from the previous quarter. If Trump and The Fed have managed to stimulate the economy enough to beat the forecast then expect U.S. stocks to make new all time highs again.
Remember, it is not so much about whether the data that is released is good or bad for the economy. The markets are more influenced by whether or not the data was expected by the majority of market participants or whether it was a shock. That is what moves markets.
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