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S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

2020-09-01 03:00:00
John Kicklighter, Chief Strategist
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S&P 500, Dollar, Crude Oil and Chinese Yuan Talking Points:

  • August has closed with the biggest 5-month S&P 500 rally since 1935 and crude oil’s strongest 4-month charge on record overtaking the 1990 surge
  • Risk appetite seems to be in the backdrop, but recognition of systemic permeates investors views with recognition of September seasonal tumult readily at hand
  • While the Dollar’s slide to multi-year lows, USDINR’s reference to Indian 2Q GDP and USDCAD’s sensitive to Tuesday event risk; I will also follow USDCNH for its deeper implications

Monthly Charts and An Extraordinary Five month Charge

Monday brought to close the month of August and subsequently the most reserved calendar month of the year for risk assets according to seasonal studies – at least my studies. Thin liquidity was certainly a familiar environmental criteria for the likes of the S&P 500 and other benchmarks over the past weeks, but that didn’t prevent some over-eager market favorites from charging to fresh record highs in the process. From the benchmark US equity index, we have seen the most impressive five-month rally since the Great Depression following the fastest tumble into recession and technical bear market on record. This certainly registers as a recovery rather than a foundational bull trend, and that is the discrepancy that will hang heaviest in the weeks ahead.

Learn more about the time frame analysis in our education section.

US 500 BULLISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -8% 12% 3%
Weekly -9% 6% -1%
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Chart of S&P 500 with Consecutive Candle Measure, 5-Month Rate of Change (Monthly)

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

Chart Created on Tradingview Platform

From another impressive monthly chart, the US standard for oil pricing (the WTI continuous futures contract), we have seen the biggest a five month rally that has out-stripped the oil shock of 1990 that followed Iraq’s invasion of OPEC member Kuwait. This is a more remarkable performance for a few reasons. Unlike the US equities indices, this asset find deeper rooting in economic health rather than sheer momentum. What’s more, the rebound followed an even more extreme slump. The unprecedented inversion in the ‘active nearby’ contract in April set an extraordinary low point. That said, the close over close performance from the monthly chart was still unfolding in positive territory. That led this growth-sensitive, risk-responsive commodity to a remarkable charge that is still short of breakout territory.

Chart of WTI Crude Oil Prices with 5-Month Rate of Change and Volume (Monthly)

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

Chart Created on Tradingview Platform

A third monthly chart that registers high on my review list is the DXY Dollar Index. On a daily chart, we have seen a month worth of congestion that has nevertheless edged the support around the trading band slowly lower. Through Monday’s close, the Greenback’s measure moved to its lowest levels since May 2018. It is hard to appreciate the technical relevance behind the slide lower until we see a chart on this high of a time frame. August’s progress brings a trendline break stretching back 11 years and a key ‘pivot’ level and Fib over the same time frame is looming at 91.85. The question I have is how market liquidity and fundamentals will encourage or curb progress.

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Chart of DXY Dollar Index with 20-Week Moving Average and 4-Month Rate of Change (Monthly)

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

Chart Created on Tradingview Platform

Transitioning into September Volatility Isn’t Like Flipping a Switch

As we move into September trade, there is plenty of anticipation that will be building behind speculative appetites. Historically, risk trends (which I measure through the ubiquitous S&P 500) tend to pick up this month from August’s trading-day adjusted nadir while volatility tends to soar. Interestingly, however, volume through this period tends to only nudge higher rather than experience an overwhelming charge. That is likely owing to the carryover of the tame conditions from the months previous. While September does show a jump on average, the first weeks of the month are often reserved. Holiday’s like the UK’s summer bank holiday (this past session) and the United States’ Labor Day (next Monday) typically extend the curb on participation. That said, expectations of a rebound in volatility against a thinned backdrop can trigger more disruptive risk aversion, which very likely contributes to the reality that the S&P 500’s only month to average losses is September.

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Chart of S&P 500 and VIX Seasonal Performance (Monthly)

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

Chart Created by John Kicklighter

As market conditions continue to pressure the preternatural calm of the markets, I remain cognizant of the foundations of this speculative resilience. While there are a number of factors at play (recovery from an abrupt shut down, speculative familiarity, the rise of new financial products), perhaps the most engrained motivation that I have observed these past years has been the influence driven by central bank support. Stimulus has shifted the presumption of risk from individual market participants’ shoulders onto these institutions’ balance sheets. This is earnestly a temporary fix, but it can be stretched for years into the future. My concern is the erosion of the perceived efficacy of these efforts and the unintended leverage in speculative exposure these conditions have inspired. While this factor may be overwhelmed in headline time over the coming weeks, it one of the core settings for the systemic backdrop.

Chart of S&P 500 and Aggregate Balance Sheet of Major Central Bank Balance Sheets (Monthly)

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

Chart Created by John Kicklighter with Data from Bloomberg

For the Here and Now: USDCNH and AUDUSD

While it is one of the rare times to truly appreciate the bigger picture and seasonal norms, we can’t lose sight of the more time sensitive matters to navigate. The economic docket is thick with scheduled event risk this week. In the past session, the top headline was China’s official PMI updates. The manufacturing update for August fell just a little short of forecasts while service growth accelerated. China is still more dependent on its trade, but I was less impressed with the docket and more interested in the USDCNH. This pair has dropped to a two-year low that seems to show a shift away from trade war offset interests by Chinese authorities and more interest in reflecting a faster economic recovery relative to the United States. This is a trend to watch.

Chart of USDCNH with 20-Day Moving Average and Disparity Index (Daily)

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

Chart Created on Tradingview Platform

For more intense interest in anticipation, there are a few highlights ahead. While there are a few highlights on the Euro’s docket, I will not set my EURUSD views around German and Eurozone employment. Instead, I will put a greater focus on the likes of USDCAD where manufacturing data from the US (ISM) and Canada is due. That said, the nature of that pair is one of reservation. AUDUSD on the other hand is showing remarkable progress on the technical side. It may not be advancing in leaps and bounds, but its persistence reflects that of the US indices. With the RBA rate decision followed by Aussie 2Q GDP, there is a lot on tap for volatility.

AUD/USD BEARISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 5% -6% -1%
Weekly 24% -25% -5%
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Chart of AUDUSD with 20-Week Moving Average (Daily)

S&P 500, Crude Oil and Dollar Welcome September a Month Known for Volatility, Risk Aversion

Chart Created on Tradingview Platform

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