S&P 500, Dollar, Gold Talking Points:
- Despite the benchmark S&P 500’s proximity to record highs throughout this past week, the risk-measure would not make the low-boundary effort to force a break
- Liquidity and volume traditional drained through this extreme summer lull will need to find systemic upheaval from a driver like the pandemic, recession or stimulus to override
- Meanwhile, the Dollar may find itself in a better position to break recent congestion given its relative status with themes and event risk on tap
Market Conditions are So Draining Even the S&P 500 Can’t Hit a Record
Incredibly, the S&P 500 was within 2 percent of record highs (set back on February 19) throughout this past week without ever hitting the milestone. That is quite remarkable given the general status of the market these past four months and the propensity for investors to throw in their conviction behind measures that reinforce the complacency bid. Nevertheless, the speculative gravity of a technical break with the typical assumptions of an entry and stop order flush was not enough to override the hesitancy formed in thinned liquidity and closer observation of the underlying fundamental issues laid bare without the steady drip feed of stimulus to cloud the questions we may have. I believe it is still very probable that a break to record highs for the S&P 500 is in the cards, but follow through would likely struggle almost immediately. Panic is more influential than greed, and that’s why I keep ready watch in case the market instead decides to break below 3,200.
Chart of S&P 500 with Volume (Daily)
Chart Created on Tradingview Platform
What is really throttling the markets is the lack of market liquidity. Volume on the SPX this past week had slowed to levels commensurate with holiday trading conditions. That is not too surprising given the seasonal expectations through the height of summer conditions. Historically, August offers up drained market depth and assumptions of a comfortable repeat in restraint. While seasonality holds considerable sway over participants and even has its grounding in practical application, there are too many unresolved systemic themes for me to find comfort in holding a long risk view much less adding to one or even ‘selling volatility’. Between the recession, pandemic, trade wars and questions arising over stimulus; there are too many pillars at risk of topple. Learn more about the importance of liquidity in our DailyFX education section.
Chart of the Average S&P 500 Monthly Change, Volume and VIX back to 1980
Chart Created by John Kicklighter with Data from Bloomberg Terminal
While I attempt to be pragmatic about market conditions with a default to uneasy complacency unless a major fundamental (or technical) upheaval comes to pass, I never loose site of the amplitude imbued in the market. Volume and volatility are tightly bound such that the drain in liquidity can naturally curb medium-term activity levels. That said, thin markets can also make for an extreme transmission of shocks. That doesn’t make trend development easier, but it can definitely lead to severity in short-term market movement.
Chart of S&P 500 Volume and the VIX Volatility Index (Weekly)
Chart Created by John Kicklighter with Data from Bloomberg Terminal
Don’t Discount Volatility Where Its Persists
If volatility can compound, one of the key places to keep close tabs is gold. While the precious metal pulled out of a dive that saw the worst single-day drop since April 2013, it nevertheless closed the week in the red. That was the first retreat in 10 trading weeks – ending the longest stretch of gains since 2003. I doubt that downdraft alone will shift the tides for the precious metal, but it does lead an extraordinary volatility that can perhaps keep this market out of the shallow end of the pool. And, given gold’s reflection of underlying risk trends and confidence in fiat assets (Dollar, Euro, Pound, sovereign bonds, etc), holding aloft represents a serious disturbance for those looking for happy complacency.
| Change in | Longs | Shorts | OI |
| Daily | -4% | 18% | 2% |
| Weekly | 0% | -5% | -2% |
Chart of Gold with Consecutive Candles and Net Speculative Positioning (Daily)
Chart Created on Tradingview Platform
Another area of volatility to monitor into the new trading week is one based on a theme. The USDCNH may not be FX traders’ fist exchange rate to refer to, but it holds serious importance in the development of trade wars. Now, there are a host of trade issues among major economies (US-Canada, US-Eurozone, etc), but here are few as at-risk with global implications as the US-China throwdown. There was supposed to be a Saturday summit between US and Chinese representatives that was meant to represent a six-month progress report on the Phase 1 trade deal; but officials suggest there were scheduling errors. More likely, the two sides relations have deteriorated late which leaves their economic tie strained. I will watch USDCNH to see if China uses this exchange as a signal or outright pressure.
Chart of USDCNH with 20 and 200-Day Moving Averages (Daily)
Chart Created on Tradingview Platform
The Dollar and Its Relation to Systemic Themes
Another point of fundamental sway to monitor into the new trading week is the influence of the other (related) systemic matters. The potential for stimulus from the US and the rebound in the global pandemic are lurking volatility risks. I still think EURUSD is playing a critical role in evaluating the Greenback for its stimulus position (bullish when it rises as it supports V-shaped recovery speculation), but AUDUSD deserves its own review. While Australia is not exactly known for its external capital infusions from central bank of government (New Zealand is more active there), the rise in COVID cases in Australia adds another layer of pressure. And yet, the pair is still strongly correlated to the slow advance measured by the S&P 500.
Chart of AUDUSD Overlaid with German-US Confirmed COVID Cases (Daily)
Chart Created on Tradingview Platform
Another major that holds remarkable appeal is the GBPUSD. At 1.3200 resistance we have a multi-year trendline resistance. At 1.3000, there is the neckline of a head-and-shoulders neckline support. This pair looks ready to break and technicians have a compelling case for either direction. Yet, a break is one thing and follow through something completely different. As it were with the Pound though, the start to a fresh round of Eurozone-UK trade negotiations this week may rouse enough interest to start the ball rolling.
| Change in | Longs | Shorts | OI |
| Daily | 2% | -8% | -1% |
| Weekly | 9% | -9% | 3% |
Chart of GBPUSD (Daily)
Chart Created on Tradingview Platform
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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