S&P 500, Dollar, GBPUSD, AUDUSD Talking Points:
- Risk assets continue to churn volatility and speculative interests seem to continue a heavy turn, but traction in the form a clear trend remains elusive
- Recognition that the US election can generate exceptional volatility seems to short circuit conviction before it can gain serious traction
- The rise of global COVID cases, faltering post-Brexit trade talks, an Aussie Dollar acknowledging its stretch and key GDP prints are all event risk ahead
S&P 500 and Other ‘Risk’ Benchmarks May Falter on Election Anticipation
The past week wasn’t particularly productive in defining the undercurrent in sentiment. Despite the preternatural speculative bid around hope for unrealized confidence injections like US fiscal stimulus or the dawning of unmistakable fundamental threats like a swell in coronavirus cases, the market seems unwilling to commit to an outright trend. This is clearly not owing a scarcity of systemically-important issues, but it may very well be the result of heightened anticipation for an even more loaded matter further out. For my overview of risk trends this past week, the S&P 500 was once again an appropriate milestone with a threatening swing that ultimately left the weekly chart to cut a ‘doji’. Under certain circumstances, such a pattern can represent a threat of intent; but in this case, it reads more like volatile indecision.
Chart of S&P 500 with 50, 100-Day Moving Averages, COT and 10-Day ATR (Daily)
Chart Created on Tradingview Platform
There are plenty of scheduled fundamental landmines in the week ahead, not to mention the risk of potential issues that could rear at any time with little-to-no forewarning. And, while it is possible that a dramatic development throws the entire market into disarray with the result of a broad trend, such a spark would likely need to be massive in scale. The hurdle that any potential catalyst would need to clear is the anticipation anchored in the November 3rd Presidential election. It can be difficult to evaluate how great an impact this event can have given the scope of possible outcomes. However, the confusion in a contested outcome against a backdrop of coronavirus-induced economic hardship could be extremely disruptive. Such risk is hard to evaluate in a surface measure of risk trends like the S&P 500. However, from the spread in the November-October VIX volatility index we start to appreciate the degree of concern behind the market’s calmfaçade.
Read more on how the VIX has acted around previous US Presidential elections in our special report analyzing the ‘fear gauge’ during this cycle.
Chart of S&P 500 withVIX October-November Spread (Daily)
Chart Created on Tradingview Platform
Market Conditions and Fundamental Themes
I believe in three analysis types: fundamentals; technicals and market conditions. That last type is usually folded into one of the first two methods, but that tends to diminish its importance for those analyzing the markets. Conditions reflect the kind of systemic matters that can lead charts to flounder around otherwise remarkable patterns or deflate the impact of economically important event risk. In the past years, there has been an unmistakable complacency arise despite a host of core risks that would normally unnerve the investment rank. I believe that artificial tolerance is actually a by-product of confidence in external support (eg stimulus). Search interest in ‘stimulus’ has surged these past months with the pandemic’s hit even though the US government has not acted to pick up the baton from the Fed. It is perhaps not a coincidence that the same factors that amplified expectations of artificial capital infusion also led to a surge in ‘day trading’ interests. With the risk of a return to recession and benchmarks like SPX near record highs, this seems an extremely risky time to venture into day trading.
Chart of Google Search Ranking in the US for ‘Day Trading’ and ‘Stimulus’
Chart created by John Kicklighter with data from Google Trends
On the fundamental side, while political uncertainty represents a matter that can readily run roughshod over the broader market, it is not presently standing as a persistent threat to market stability. That can open the door to other fundamental influences. One such concern that has swelled and surprisingly not caught the imagination of the market is the increase in Covid-19 cases. Confirmed cases in the US are on the rise again while those in Germany and Italy hit fresh record highs this past week. Even though the amoral market will often discount the societal toll something like this can have, the last economic impact in the April/May first phase is too overt to miss as a yardstick.
Chart of Worldwide Coronavirus Cases (Daily)
Chart Created by Google with Data from Wikipedia
If we are to ultimately find the open-ended fundamental issues undetonated through the coming week, there is always the potential of scheduled event risk ahead. Tangible economic health seems to be a fundamental theme with particular bite ahead. This past week, the recognition of the coronavirus revival seemed to find a ready offset in otherwise limited scope updates from the likes of US retail sales and the UofM consumer confidence survey which both beat expectations. Ahead, the stakes increase significantly. Monday opens with the Chinese 3Q GDP release. At the end of the week, the October PMIs are scheduled. And, in the between, we have a continued earnings season docket which includes the likes of Netflix, CSX, American Airlines and Tesla.
Chart of US Retail Sales (Monthly)
Chart from St Louis Fed’s Economic Database
A Few Loaded Fundamental Regions/Currencies
While much of my attention moving forward will be trained on the systemic issues, I will also be keeping tabs on more discreet fundamental issues that maintain a concentrated impact potential. Looking to restore the Brexit headlines to a state of prominence, the UK has passed its self-imposed negotiation deadline (October 15th) without its long sought-after compromise with EU counterparts. The rhetoric from PM Johnson was noticeably bombastic with threats to simple walk away. However, the remarks urged little shift in the obstinance of Europe towards its once-member. The situation is currently in limbo similar to the Sterling. Monitor EURGBP and GBPUSD closely this week.
| Change in | Longs | Shorts | OI |
| Daily | -1% | 4% | 1% |
| Weekly | 9% | 13% | 10% |
Chart of GBPUSD with 50 and 100-Day Moving Averages (Daily)
Chart Created on Tradingview Platform
Another concentrated fundamental theme that I am keeping in mind in the week ahead is the status of the Australian Dollar. There is a material connection of this currency and country to the fortunes of China. Back during the Great Financial Crisis, its economic ties helped keep the island nation from tipping into recession. Yet, the situation is vastly different now. Australia is joining the Western World in placing itself at odds to the world’s second largest economy. Are broken ties leading the Aussie Dollar to an overdue reversal for the likes of AUDUSD, EURAUD and AUDJPY?
| Change in | Longs | Shorts | OI |
| Daily | -5% | 13% | -2% |
| Weekly | 3% | 8% | 4% |
Chart of AUDUSD with 50, 100-Day Moving Averages (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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