The Fed Cut 50bps. SELL Equities?

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 update for Monday, 23rd September. It’s around 9:00 a.m. London time, so if you want to trade equity index futures, S&P 500 futures, NASDAQ, FTSE, or DAX, whether you're going long or short over a one- to two-week swing timeframe, what factors do you need to think about? How should you make a decision to go long or short on those equity index futures? That’s what we're going to dig into in this video.

The first thing you need to do when thinking about investing on a one- to two-week timeframe when trading equity index futures is contextualising price action. How are markets behaving? How are different global financial markets and assets interacting? Last week, the price action was really quite strong, and of course, the week was dominated by the question of what the FED would do at its meeting on Wednesday. Would it cut by 25 basis points or go for 50? Coming into the start of last week, 25 was absolutely baked in the cake, a no-brainer. The question was whether they would do more. On Monday and Tuesday, there was about a 65-70% chance they might cut by 50, and then on Wednesday, we got those 50 basis points, which propelled markets higher on Thursday.

What we saw last week were strong markets pretty much across the board, led by the smaller midcaps. The NASDAQ 100, which we’re showing now, is trying to break out of that pennant formation on the back of Thursday’s strength. You can see the S&P 500, also shown here, back at its highs over the course of last week, hitting that level. The week was led by smaller midcaps: the S&P 400 was also back at its highs, and the S&P 600, the small caps, were similarly back at their highs. It was a very strong week across the board in US markets.

There was some lagging price performance from the likes of Nvidia and the Philly SOX. In fact, the Philly SOX was one of the worst-performing major equity indices in the US, as was the Dow Jones Transportation Index. Interestingly, Nvidia rolled over a bit last week, down around 2-2.5% over the course of the week, despite the strong performance of other major indices. That in itself is pretty interesting. Not all asset classes participated in last week’s strength on the back of the 50 basis points cut. Maybe that’s speaking to the rotation we’re seeing within the US equity market in recent weeks.

However you look at it, momentum is now pretty toppy. We've had a good week or two in major equity indices. If you look at the global equity momentum model, which we’re showing now, it’s back on a sell signal. If you look at the US S&P 500 industry group momentum model, where we analyse the momentum of all the industry groups underlying the index and aggregate that, it’s also close to a sell signal. Going even deeper, looking at the single stock momentum model, which we’re showing now, that hit a sell signal at the end of last week. So, momentum at the index, sector, and single stock levels is either on a sell or very close to one.

As you can see from the single stock model over the past six months, there have been four prior sell signals, each marked with red arrows. All of them resulted in price action in the S&P 500—the main equity index—that was either sideways, down, or meaningfully down over the following one to three weeks. So, many sell signals are starting to emerge, and the markets are looking a bit toppy. If you look at single stock call option volume, there’s a similar message: some frothiness is returning to the market in the near term.

So, how do you want to trade this market? To see how we’re thinking about it, and for our daily updates on market price action and trading models, take a free trial of the Risk Appetite Gauge publication. Simply click on the link below, and we’ll send it to you free for a few trading sessions. If you’re already subscribed, it should be in your inbox by around 9:00 a.m. London time on every business trading day.

Aside from the models and price action across various global assets, what else are we watching in terms of macro events this week? Well, there’s a bunch of central bank meetings—second-tier central banks in a sense—but all are quite interesting: the SNB, the Riksbank, and the RBA. These will be closely watched for their messages on inflation and interest rates.

Secondly, there are a series of flash PMIs from across the globe starting today, providing an initial take on economic activity in September and giving a good sense of how the month is playing out from a macroeconomic perspective. Finally, we’ve got other significant data points, including US consumer confidence, durable goods orders, German IFO, personal income, and spending, plus a range of other macroeconomic data over the week.

That’s it from us. That’s your morning market update for Monday, 23rd September. Thank you for listening. Please subscribe to these videos on YouTube—simply click the Subscribe button—and share on social media, or follow us on Facebook, LinkedIn, or Twitter. Thank you for listening. Stay safe and trade well.

FIG 1: NDX100 futures chart/NDX100 candlestick chart - breaking out of pennant

FIG 2: SP500 – back at its highs

FIG 3: US weekly performance – led by small and mid caps

FIG 4: S&P400 – back at highs

FIG 5: Nvidia – down around 2 to 2.5% over the week
FIG 6: Global equity composite momentum – back on SELL

FIG 7: US sector momentum – industry groups….

FIG 8: US single stock momentum – reached SELL at back end of last week….

Fig 9: RAG1 + RAG2 - rolling over

FIG 10: Risk appetite scoring system

FIG 11: Single stock call option volumes