Trading 101: Buy The Rumour, Sell The Fact?

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

Welcome to Shortview Trading. This is your morning market update for Monday, the 16th of September. It's around 9:00 a.m. London time. What matters today and this week for markets? 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 models and indicators will give you the clearest steer on near-term market direction? That is the purpose of this update.

Markets rallied across the board on Friday. All of the 28 indices we track closed higher, driven by growing expectations that the Fed is going to deliver a 50 basis point cut this Wednesday. Initially, earlier in the week, the market had dialed back the case for a 50-basis-point cut, not least because of the stronger-than-expected inflation number on Thursday. However, that changed after the Wall Street Journal article by Nick Timiraos, considered to be a mouthpiece for the Fed. He talked up the probability that the Fed would go ahead with a 50-basis-point cut.

If you look at the rates market and the front end of the bond market, we're now fully priced for a 25-basis-point cut, with a 50% chance that the Fed will do a 50-basis-point cut. That's reflected in the move lower in one- and two-year Treasury yields, which closed at new year-to-date lows on Friday. Consistent with that, the yield curve has continued to steepen. This is the chart of the two- to ten-year spread on your screen. You can see it's now convincingly disinverted. Gold prices were strong again, up 0.9% on the day, closing at a new record high, while the dollar weakened. All of this was, of course, positive for US equities, which rallied back towards the top of their recent pennant formations.

For example, in the NASDAQ 100, it’s been trading in an increasingly narrow range, with higher lows and lower highs. This is a price pattern usually associated with indecision in markets as they tread water before eventually breaking out one way or the other. The key question is, which way will it break? Will the NASDAQ and other equities follow the usual "buy the rumor, sell the fact" pattern? That’s when markets rally in anticipation of positive news but sell off when the news is actually announced. Will that happen ahead of this week’s Fed meeting?

We answer that in our daily publication, where we provide one- to two-week trading recommendations—long or short—on US equity futures. It’s available on the website to subscribers, and we also offer a free trial. If you’re interested, click the link below, enter your name and email address, and we’ll set you up with a free trial.

What gives us an edge in making these calls on equity markets? It’s indicators like the one you see on your screen now. This is our technical scoring system for the S&P 500, designed to pick the key short-term turning points in the index. It generated a buy signal in early September, as you can see. It’s currently neutral but is working its way towards a sell threshold. So, on this measure, there’s a bit more headroom for equities, some extra short-term upside ahead of the Fed meeting, which fits the "buy the rumor, sell the fact" strategy.

So, how are we trading this market? What signals are we getting from other short-term models? For details on all of that, have a look at today’s publication.

What are we watching this week? All eyes, of course, are on the Fed policy decision on Wednesday. There’s also a housing data theme this week. We have the NAHB home builders index tomorrow, as well as housing starts and permits. Existing home sales data is also out this week. Additionally, we have policy decisions from the Bank of England and the Bank of Japan on Thursday and Friday.

That was your morning market update. Do follow us on YouTube by searching for Shortview Trading, and join us on Twitter, LinkedIn, or Facebook. Thanks for listening!

FIG 1: US Treasury 1-year and 2-year Bond Yields

FIG 2: US Government Benchmarks (10 year less 2 year) yields

FIG 3: Gold Futures USD/oz with 50-day and 200-day moving averages

FIG 4: NASDAQ100 6-month Candlestick Chart with 50-day and 200-day moving averages

FIG 5: S&P500 Futures Short-Term Technical Scoring System