Skip to Content
News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

Free Trading Guides
Subscribe
Please try again
Select

Live Webinar Events

0

Economic Calendar Events

0

Notify me about

Live Webinar Events
Economic Calendar Events

H

High

M

Medium

L

Low
More View More
Dow, Risk Attempt Recovery Amid Competing Theme: Coronavirus, Fed and Earnings

Dow, Risk Attempt Recovery Amid Competing Theme: Coronavirus, Fed and Earnings

What's on this page

Dow, Dollar, USDCNH Talking Points:

  • Monday's sharp risk-aversion move was checked this past session with considerable breadth but not a reassuring sense of conviction
  • There is reasonable expectation of key competing themes ahead between coronavirus fears, Fed policy anticipation and earnings hope
  • Certain drivers carry innate bias in their underlying scenarios, but first and foremost traders should keep tabs on the underlying bias

Averting a Sentiment Reversal or Breather Before the Dive

Following Monday’s broad tumble in risk-leaning assets, it grew difficult to ignore the threat that sentiment could be systemically shaken from its useful complacency. With a host of benchmarks on the ‘risk on’ side of the spectrum posting notable – albeit short-term – technical breakdowns, the ranks were on high alert for signs of follow through deleveraging. Beyond the simple high levels of favorite milestones like top global equity indices, there are various measures for exposure which paint a troubling picture for a market that comes under any severe stress. Below is the NYSE’s brokerage leverage between credit and debit balances. Though leverage adds to the profile of potential losses, recognition of risk alone is not enough to pitch the market into a tailspin. The question is when this tipping point is met which in turn leads many to obsess (myself included) of the ‘how’ it will be prompted.

Chart of S&P 500 and NYSE Broker-Level ‘Leverage’ (Monthly)

Chart made by John Kicklighter with data from Bloomberg Platform

If your preference is not to lead with fundamentals and evaluating the difficult-to-register priorities of a crowd, there are technical milestones that are important as well. The correlation, direction and pace of risk-sensitive assets is my preferred measure of speculative conviction. That said, there are certain individual benchmarks that can offer interesting insight on a more timely basis. The S&P 500 for example is perhaps one of the most frequently referenced and heavily traded (through derivatives) such market leader, but its interaction with the prominent channel of the past three months leaves open greater interpretation. That isn’t so for the Dow (and Nasdaq). This particular index is facing a very clear former support as new resistance. Looking to some of the other risk measures I like to follow, their ability to close their bearish gaps to start the week was far less remarkable, leaving broader conviction more likely more attuned to concern.

Wall Street Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -15% -1% -4%
Weekly 5% -7% -5%
Are retail CFD traders positioning for a true Dow Jones reversal?
Get My Guide

Chart of Wall Street – The Dow Jones Industrial Average with 20-Day MA (Daily)

Chart Created with TradingView

What Are the Top Fundamental Themes to Watch Ahead?

With the question of the bearing in global sentiment as seemingly contentious as it has been in three months, the natural next step is to start looking for the practical catalysts that can tip the scales one way or the other. Yet, before you consider what will dominant the headlines, consider the underlying bias of the markets. I’ve highlighted many times before that there have been periods where good news has gone unnoticed by the market while the bad triggers an avalanche of fear, and visa versa. That is the inherent bias that can shape the influence of not just event risk, but broader fundamental themes as well. Against this backdrop, it is also worth noting that certain themes can also hold greater potential through certain scenarios. Below are the initial results of a poll I conducted in Twitter asking traders what they thought the most important theme would be over the next session. A thin margin voted the coronavirus headlines. This is not a theme that can really charge optimism and even relief could be difficult to muster given the nature of the situation. Consider that should the headlines and relative China market performance metrics (Dow to FXI rather than USDCNH) start to command headlines.

Poll from @JohnKicklighter Handle in Twitter.com

A marginal difference to the second place most market-moving threat find the FOMC decision due Wednesday afternoon in Washington DC stirring considerable interest. From a risk perspective, this particular topic has prompted much more speculative relief and risk build up based in complacency speculative reach over the past years. Monetary policy’s general effectiveness is a latent concern among some (myself a big proponent of this monitoring), but that is the exception to the rule. Most still see central banks as ready-serving backstops to any disruption in the market. That makes it more prone to spur ‘risk on’ given the particular outcome. The probability of change at this meeting is low, but the market is pricing in anticipation throughout 2020. In fact, there is chance of both cuts and hikes looking ahead.

Table of FOMC Policy Meeting Scenarios

Chart made by John Kicklighter with data from Bloomberg Platform

Growth Interests Will Be Waiting to Take the Reins After the Fed Passes

While the focus will be on the Fed when it comes to the broad and targeted influence of monetary policy, it is worth mentioning the Bank of England (BOE) is on deck for its own policy assessment on Thursday. This is particularly important for the Sterling and GBPUSD in particular, though it may not rise to the occasion of a global sentiment catalyst. The interest is based in the contentious 50 percent probability of a rate cut at the gathering according to swaps. That means that at least half of the market will be surprised one way or the other. That degree of volatility potential will give pause to any traders tempted to take significant exposure with that uncertainty just around the corner.

Chart of GBPUSD with 200-Day Moving Average

Chart Created with IG Trading Platform

A theme that will gain greater traction as the week wears on is the health of the global economy. The most prominent listings are the US and Euro-area 4Q GDP updates due Thursday and Friday respectively. However, there is other data that will draw attention to the general theme – and recession fears if the data prints poorly – in the interim session. This past session offered up a mixed view form the world’s largest economy with a US consumer confidence vaulting to 131.6 (from 128.2) for the Conference Board’s January update but non-defense durable goods orders excluding transportation (one of the more popular proxies for GDP) dropped unexpectedly by -0.9 percent. The US 10-year to 2-year yield curve bounced alongside risk trends, but the pressure is still clearly present. For Wednesday, earnings will take center stage. Apple reported robust earnings after hours Tuesday night. For the upcoming session, we are due blue chips and sentiment leaders in General Electric, Boeing, Microsoft and Facebook.

If you want to download my Manic-Crisis calendar, you can find the updated file here.

.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES