Toppy Equity Markets!

22 October 2024

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, 21st October. It's around 9 a.m. London time. So, if you want to trade equity index futures, if you want to go long or short the S&P 500 futures, or the FTSE, the DAX, the NASDAQ, any of those equity index futures, how should you go about that? What factors do you need to consider when thinking about trading markets on a one to two-week time frame? That's what we're going to dig into in this video.

And the first thing you should think about before deciding whether to go long or short equity index futures on that one to two-week time frame is the price action. The price action of global financial assets, the price action of the S&P 500, the price action within the S&P 500 amongst key sectors – all of this is part of the global financial puzzle. It's important to understand this before you start thinking about whether to go long or short equity index futures.

If you look at markets over the last couple of weeks, there's clearly a narrative that's been building, and that narrative is that Trump has got momentum in the election, and that's influencing asset prices. Look at this quote from the JP Morgan cross-asset market strategists, where they talk about Trump’s momentum driving financial prices, driving cyclicals, and the market even thinking about pricing in a Republican clean sweep. Similarly, earlier last week, Stan Druckenmiller, a very well-known hedge fund manager, talked about how markets over the last couple of weeks have been pricing a Trump victory. Indeed, if you look wider afield, you see the betting odds for the election have clearly moved dramatically in Trump's favour.

Look at the chart we're showing now – RealClearPolitics betting odds shifted dramatically towards Trump and away from Harris in the last few weeks, over the course of October. Similarly, some of the well-regarded election forecasters, like Nate Silver of FiveThirtyEight, have shifted too. Nate Silver’s model moved towards favouring Trump at the end of last week, having favoured Harris for several weeks. So now he’s predicting Trump as the most likely outcome, although with a lot of uncertainties still attached. Similarly, Silver’s former forecasting outfit, 538, now owned by ABC News, shifted over the weekend to favour Trump.

It’s clear that the financial markets, election betting odds, and forecasters are all shifting to favour Trump, and you can see that reflected in various asset prices. Look at how airlines have behaved over the last couple of months, up around 45% since their August lows. Look at financials, with the S&P financials up strongly over the last few weeks – about 5% in October. Or look at gold, which is presumably pricing in a fiscally expansionary Trump.

From a market narrative perspective, from the political betting odds and key forecasters, it looks like momentum is really shifting towards Trump. Of course, Trump is seen as business-friendly – that’s what equity markets like about him. He’s into deregulation, reducing rules, cutting corporation tax, reducing the capital that banks are required to hold, etc. All these factors are business-friendly, and so, the argument goes, cyclical areas of the market benefit. That’s why airlines have been up dramatically over the last couple of months – very cyclical. More importantly, financials, which are a larger sector, are up dramatically in the last few weeks – around 5% in October. The likes of Bitcoin have also bounced sharply in the last 5-10 days. We know Trump has talked about promoting Bitcoin, so all of this feeds into that narrative.

But it’s not quite that simple. If it were all about Trump, you’d expect the dollar to weaken – Trump is fiscally expansionary, he wants tariffs on all US imports, which is dollar-negative. You’d also expect other assets, like oil services companies, to do well. Trump’s mindset is “drill, baby, drill,” which should be great for oil services companies, but the oil services sector is actually down significantly in the last couple of weeks. So, it’s not entirely clear that this is all about Trump.

In fact, as we wrote about in last Friday’s Longview, or indeed Longview from London (available on Substack), there’s a lot more going on in these global financial markets. There’s been a major asset allocation switch out of bonds and into equities, which has been happening since early August, and that now looks quite toppy. In August, after that initial sell-off, equity markets were very oversold – now they’re overbought. Bonds were very overbought in early August, but now they’re very oversold. You can see how the asset allocation switch has played out. When you look at our model of equities relative to bonds on that medium-term time frame, we’ve gone from a buy signal on equities in early August to a sell signal on equities and a buy signal on bonds today. So, it looks like there’s been a major asset allocation switch over the last couple of months, driven by positioning and technical models.

On top of that, we’ve had huge stimulus announcements out of China, which is very positive cyclically for the global economy and therefore needs to be priced into markets. So, it’s not just about Trump – Trump is part of it, but there’s a lot else going on. That’s why we lean on the models – they’re objective, not back-fitted, and not trying to fit the narrative to the price move. They’re showing you what’s really happening with risk appetite and positioning, and that’s a great way to invest in markets on a one to two-week time frame, or even longer.

If you're interested in taking a trial of our one to two-week Daily Risk Appetite Gauge, this is a product where we make explicit recommendations on S&P index futures and other index futures over a one to two-week time frame. We incorporate all our models, updated every trading session, talking about price action in global financial markets and the S&P 500. We give explicit recommendations on whether to go long or short equity index futures on that one to two-week time frame. If you're interested in a trial of that, simply click on the link below, fill out your details, and we'll send you the Daily Risk Appetite Gauge for free for several trading sessions.

If you’re already a subscriber, it should be in your inbox around 9 a.m. London time, every business day.

JP Morgan Quote from cross asset market strategist

“JPMorgan says financial markets are starting to price in a Trump win and possible Republican sweep……The recent rally in U.S. equities to all-time highs, and the outperformance of U.S. banks in particular, are among the signs that investors are betting on former President Donald Trump to win the November general election, and follows a similar pattern from 2016, the bank’s cross market strategist Nikolaos Panigirtzoglou wrote Wednesday.”

Source: CNBC 17^th October 2024, https://www.cnbc.com/2024/10/17/jpmorgan-says-financial-markets-are-starting-to-price-in-a-trump-win.html

Stan Druckenmiller quote

“During the past 12 days, the market has seemed “very convinced Trump is going to win,” Druckenmiller said Wednesday in a Bloomberg Television interview. “You can see it in the bank stocks, you can see it in crypto.”

Source: Bloomberg 16^th October 2024, https://www.bloomberg.com/news/articles/2024-10-16/druckenmiller-says-market-is-very-convinced-trump-will-win

FIG 1: Election betting odds (past 6 months)

1-Oct-22-2024-10-34-40-6361-AM