Below is a transcript from Monday's Morning Market Hit video above.
Welcome to Shortview Trading. My name is Chris Watling. I'm the CEO and Chief Market Strategist of Longview Economics and Shortview Trading, and this is your Morning Market Hit for Monday, 4th of November.
What matters for markets? If you want to trade equity indices on a one- to two-week basis and are considering moving either long or short on equity index futures like the S&P 500, Nasdaq, FTSE, or DAX, what factors should you be thinking about? What should you look at as you go about making that decision? That’s what we’re going to dig into in this video.
The first thing to consider is what’s been driving the market. Why is it where it is, and what’s behind recent moves? What’s the explanation? If you listen to mainstream media, you’d be fairly confident it was the "Trump trade." You can see in this chart that betting odds have improved dramatically over the course of October, at least up until this weekend. That has been the narrative: the "Trump trade" is driving bond yields higher, leading to a stronger dollar and pushing up the equity market. But if you look at the actual data, it’s not that clear. The S&P 500, since the end of September, is flat. The Nasdaq 100, since the end of September, is flat. And even more cyclically sensitive, domestically focused equity market indices like the S&P 400 and S&P 600—representing mid-caps and small caps in the US—are also flat.
In other words, the equity market hasn’t really been responding; it’s been struggling and losing momentum. Indeed, even looking at bonds, one alternative narrative is that if Trump is elected and gains control of Congress and the Senate, it will be easier for him to push through another fiscal stimulus package. That would be positive for the cyclical side of the economy, at least for the next year or two, so no wonder bond yields are backing up. But, as I mentioned, there’s an alternative narrative. Look at our model of the relative strength of equities versus bonds in the US on a medium-term, multi-month basis. Going back to early August, equities were oversold after that pullback, while bonds were overbought. The bond prices had been rallying, and yields were low. Over the last couple of months, we've seen a reversal of that trade. This has essentially been an asset allocation switch, leaving us at the opposite end now: bond yields have backed up, prices have sold off, bonds are oversold, and equities were overbought until recently.
This suggests an alternative narrative for the bond market activity, and it’s not certain that a "Trump trade" is really at play. As is often the case, you have to look at the models to truly understand what’s going on: how is liquidity doing? What is the market positioning, and where are we in terms of risk appetite, fear, and greed? Our sell-off indicator and other models provide essential insights here. Understanding market behaviour in response to news flow is crucial. For example, if a market is very "greedy" and receives positive news but then sells off, that’s a pretty bearish sign. Similarly, if a market is fearfully priced, with high volatility, and still sells off despite good news, that’s concerning. Contextualising these factors and understanding the underlying positioning, fear and greed, and technical market conditions are what really matter—and that’s our focus.
This is not to suggest that the election doesn’t matter; it does. It will drive policy changes and impact markets on a multi-month basis. But equally, if not more important, is how the models and market positions align heading into the election this Tuesday. In that vein, we've been monitoring the loss of momentum in equity markets over the last few weeks. As mentioned, the S&P 500 has been flat for five or six weeks. Momentum at the index, sector, and individual stock level has been deteriorating over recent weeks, particularly through October. You can also observe this in the Nasdaq 100 and the mega-cap tech stocks. The Nasdaq 100 has been flat over recent months, especially in the last five to six weeks, with some mega-cap tech stocks struggling within that. For instance, Microsoft is struggling at its 200-day moving average, while Apple and Amazon have both failed to break recent highs and have gone nowhere in recent months. Even Nvidia, which attempted to reach new highs a few weeks ago, appears to be struggling to hold onto those gains.
Momentum is clearly rolling over in this market, which is interesting as we approach the election with so much associated uncertainty. We’ll be watching closely, updating our models each business day, and sharing our market insights in the Daily Risk Appetite Gauge. If you'd like to hear more from us or take a trial of that product, please click on the link below. We’ll send you the product for free for a few trading sessions. If you’re a subscriber, it should be in your inbox around 9:00 a.m. London time each business day.
That was your Morning Market Hit for Monday, 4th of November. Thank you for listening. If you enjoy these videos, please share and subscribe on social media, follow our YouTube channel, or connect with us on LinkedIn, Facebook, and Twitter. Thank you for listening, stay safe, and trade well.
FIG 1: Presidential election betting odds (past 6 months)
FIG 2: S&P500 futures candlestick shown with 50 & 200 day moving averages
FIG 3: NASDAQ100 futures candlestick shown with its 50 & 200 day moving averages
FIG 4: S&P400 candlestick shown with its 50-day moving average
FIG 5: S&P 600 candlestick shown with its 50 & 200 day moving averages
FIG 6: Medium term RSI (US equities vs. bonds) shown against the S&P500
FIG 7: Momentum of US industry groups (i.e. all 24, scored and aggregated) vs. S&P500
FIG 8: Microsoft candlestick shown with its 50 and 200 day moving averages
FIG 9: Apple candlestick shown with its 50 and 200 day moving averages
FIG 10: Amazon candlestick shown with its 50 and 200 day moving averages
FIG 11: Nvidia candlestick shown with its 50 and 200 day moving averages
