The Daily RAG Equity Trading Recommendation publication recommends a one to two week LONG or SHORT position on at least one major equity index, most commonly on S&P500 futures. Recommendations are based on two suites of proprietary Risk appetite models. These measure risk appetite across the global financial landscape by plotting several risk curves each day. The publication also includes an overview of relevant global markets movements, economic and political events and any key macro data releases as well as a summary of the message generated by our proprietary models (as described above).
Report frequency: Daily (average 5 reports per week)
Recommendation (1 - 2 week Equity Index Trading Recommendation):
Stay 1/3rd LONG NDX100 March futures. Tighten stop loss to 6,420 on March futures (from 6,330).
Re-instate 1/6th LONG S&P500 March futures with a tight stop loss (@ 2,670)
US equities reached new closing highs on Friday aided by positive newsflow on tax reform (with Senators Corker and Rubio committing to support the tax plan). Both the S&P500 and NASDAQ100 closed at new highs. With that models have moved higher, and closer to SELL. In particular the NASDAQ100 short term technical scoring system and put to call model are close to SELL (although not yet at that level); the combined risk appetite model (i.e. RAG1 plus RAG2) is now on SELL; while, in contrast, the funds flow model remains at a low level (FIGs 1 to 1c). Aggregating those signals, the models suggest that, while this is not the beginning of this latest move higher, there is room for further upside (especially given strong seasonal performance in equities at this time of year). We recommend, therefore, remaining 1/3rd LONG NDX100 but tightening the stop loss to reflect the move higher in the models (and index). In particular we recommend tightening the stop to 6,420 (i.e. just below prior intraday high on 29th November) from 6,330.
We also recommend ADDing/re-instating a small S&P position. Since closing our S&P LONG last week, there has been some notable put buying (i.e. see 1 day move on Friday – FIG 2). That provides potential ‘put covering’ buying to push the S&P higher. The Longview short term ‘risk appetite’ scoring system is also not yet on SELL (i.e. still effectively just NEUTRAL – FIG 2a). Coupled with the strong seasonals at this time of year, as the Santa Claus rally typically starts on 13th/14th/15th Dec and runs through to year end, risk reward therefore favours a small additional LONG position in S&P March futures. Given low volatility, we can also run this position with a tight stop (i.e. @ 2,670). As activity from non-systematic hedge funds slows at this time of year, our sense is that low volume markets become overly influenced by the algorithms* (i.e. grind higher into year end, in the absence of significant newsflow).
Risks, as always, are multiple and include a heightening of tensions in North Korea (which could generate a ‘gapping’ in markets). Most risks, though, will be mitigated by relatively tight stop losses.
*albeit we have no proof, other than anecdotal evidence.
(most) Nasdaq models have (some) room for further upside…….
FIG 1: NASDAQ 100 ETF fund flows model vs NDX100 – remains near BUY