Global Equities: Rotation Ahead?

Below is a transcript from Monday's Morning Market Hit video above.

Welcome to Shortview Trading. This is your morning market update for Monday, 1st of July. It’s around 9:00 a.m. London time. What matters today for markets, and in particular, if you're a trader of US equity futures with a one to two-week time horizon, what should you be thinking about and focusing on? Which short-term models and indicators will give you the clearest steer on near-term market direction? That's the purpose of this clip.

US equity markets seem bulletproof. We've had a very strong rally since around mid-April, most of which was fuelled by strength in US tech stocks. The growth-heavy sectors of the market were driving the rally, and then in the past week, as you can see on this chart, the S&P has consolidated its gains. There was a bearish key reversal on Friday, often signalling a near-term change of trend from bullish to bearish.

So the key question is: having trended sideways and consolidated recent gains, are US equities preparing the ground to move higher? Is the uptrend about to resume, or is this market losing momentum, and are equities in the US about to sell off? Indeed, looking more broadly, is there about to be a phase of rotation, perhaps away from US tech stocks into other sectors of the global equity market, perhaps, for example, into European equities?

Certainly, at the moment, there are lots of reasons to be bearish, not least charts like these. This is the CBOE put-call ratio showing that portfolios are not well protected to the downside. It's generating a sell signal for US equities, indicating near-term complacency in markets. In a similar vein, volatility readings are low, another sign of complacency, suggesting that markets are now vulnerable to the downside. If we dig within the S&P and the NASDAQ, we find that key leadership stocks are overextended to the upside. This is our overextended indicator for Nvidia; it signalled a sell a couple of weeks ago. Other key leadership stocks are also overbought. So complacency is somewhat elevated, some indicators are generating sell signals for certain stocks, and there are reasons to be cautious on US equity markets.

However, the picture is pretty mixed. A number of our models are actually starting to generate buy signals. This indicator, for example, is the NASDAQ momentum model, which was on sell in mid-June. It’s now moved back to buy. So clearly, there are some conflicting messages around tech. If we look outside tech, US equity markets don’t look that frothy. If you look at the equally weighted S&P 500, for example, it’s trading at around its 50-day moving average at levels first reached in late February. It’s not looking overextended to the upside. Or put another way, the percentage of stocks within the S&P 500 that are technically overbought is relatively low, close to its buy threshold.

So what’s the conclusion? Should we sell US equities, or will the non-tech parts of the US equity market move higher? And within that, will there be rotation not just away from US tech towards non-US tech, but also into other parts of the global equity market? Clearly, there’s an argument for that. News flow overnight was encouraging for French stocks, which have been very oversold. Initial projections showed Marine Le Pen won the first round of voting with a smaller than expected majority, so it’s less likely the National Rally will win an absolute majority in France. You can see the CAC on this chart; it’s been bouncing this morning from just below its 200-day moving average.

So how do we trade in this market? What’s the trade? What are we recommending? Have a look at our daily risk appetite gauge for details on all of that. It’s available on the website to subscribers. We also offer a free trial. If you’re interested, click on the link below, enter your name and email address, and we’ll send you our daily trading publication free for the next three weeks.

So what are we watching this week in terms of data and events? Today we get ISM Manufacturing in the US. Tomorrow is JOLTS job openings. Wednesday, we get the Fed minutes from the last meeting back in June. We also get ISM Services as well as ADP employment. And then on Friday, we have nonfarm payrolls. Lots going on this week.

That was your morning market update. Do follow us on YouTube, search under Shortview Trading, and join us on Twitter, LinkedIn, and Facebook. Thanks for listening.

FIG 1: S&P futures candlestick chart (with 50-day moving average)

FIG 2: CBOE put to call ratio (1 & 3 day smoothed) vs. S&P500

FIG 3: VIX Index candlestick (with 50-day, 90-day and 200-day average)
FIG 4: Nvidia overextended ratio (relative to 50-day moving average) vs Nvidia share price
FIG 5: NDX100 momentum model shown vs. NDX100
FIG 6: Equal weighted S&P500 (with 50-day and 200-day moving average)
FIG 7: Percent of US stocks overbought (14-day RSI>70) vs S&P500 price return
FIG 8: French equities medium term technical scoring system vs CAC40
FIG 9: CAC40 Index (with 200-day moving average)