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)
Daily RAG sample - 12th July 2019
Recommendation (1 - 2 week Equity Index Trading Recommendation):
Stay ¼ LONG S&P500 futures with a stop loss at 2,950. Increase to 1/3rd LONG on weakness (if forthcoming) at 2,995.
“Monetary policy hasn’t been as accommodative as [we] thought”
Jerome Powell testimony to Congress, 11th July 2019
Equities continued to grind higher yesterday as Powell reinforced the Fed’s commitment to easing policy*. Unsurprisingly, with 10 year yields backing up, and with a steeper yield curve, that strength was led by financials (while cyclical sectors, overall, outperformed defensives). In an environment of rising bond yields, we’d expect cyclicals to continue leading the market higher. Of interest in that respect, cyclicals are not yet overbought relative to defensives (with the 14 day RSI model for the pair currently mid-range, see FIG 1). This model often generates timely signals before pullbacks/wobbles (albeit they can be a handful of trading sessions early).
Other risk assets performed well with credit spreads narrowing further (FIG 4), oil mostly holding onto Wednesday’s gains, and high beta currencies rallying on the session (i.e. as per the JP Morgan EM currency index).
Our view remains unchanged from yesterday: Risk seeking behaviour is likely to persist in the near term, underpinned by strong/growing expectations of Fed easing and, with that, a re-positioning of portfolios (as traders/investors put money back to work). Our fund flows indicator is interesting in that respect as it shows that market participants are not yet fully committed to this rally (pointing to further room for near term upside in equity markets, FIG 2). Equally, our risk appetite models are not yet signalling excessive greed (and are still mid-range, e.g. FIG 2c) while the 3 day put to call model is not yet signalling complacency (see FIG 2b). Of interest, on a medium term perspective, there’s evidence of fearful positioning. The AAII sentiment survey, for example, suggests that retail investors are bearish (e.g. see FIG 2a).
In environments of persistent risk seeking behaviour, it typically pays to stay with LONG positions until short term models have a clear SELL message and, as such, we favour remaining LONG S&P500 futures. Key risks to this position, as usual, are multiple and include the possibility that we’ve misjudged the current risk appetite regime (or that it changes over coming trading days). Other risks include the potential for a deterioration in trade relations between the US and China**.
*Powell also said yesterday: “We’ve signalled that we’re open to more accommodation”.
**In that respect the recent involvement of Zhong Shan (a Chinese hawk) in the trade talks is somewhat concerning, although this was played down by Beijing.
FIG 1: S&P500 cyclical sectors relative to defensive sectors 14 day RSI vs. S&P500 index