S&P 500, Bitcoin and Dollar Outlook Face Very Different Trading Paths
- Risk trends are not unfolding on a clear path with the S&P 500 treading water despite pushing record highs while the likes of Tilray and GameStop exploit extreme rallies
- There are certain speculative benchmarks that seem to enjoy systemic support like Bitcoin’s constant celebrity reinforcement and EM market’s ability to draw on stimulus
- Traditional fundamentals – at least scheduled – are light next week which placers the onus for both US indices and the Dollar as haven on underlying ‘risk’ views
A Distinct Contrast in Risk Appetite and Conviction
The picture of risk appetite we enter the new trading week with is very different depending on what benchmark we chose as our milestone. Given the light fundamental docket we are coming off this past week, restraint like we witnessed from the S&P 500 and other US indices seems fitting. That said, tempo wouldn’t keep the most heavily securitized measure in the financial system from tagging a fresh record high through the close Friday. And yet, the most restrictive five-day range since August – and pre-pandemic before those summer doldrums – rouses some very serious questions. Those issues are only furthered when we consider the most recent speculative swell from pot stocks like Tilray (TLRY) this past week or the relentless climb from Bitcoin and cryptocurrency. Which chart is a truer reflection of market sentiment? I tend to lean in favor of liquidity, but the flare ups suggest markets are reflecting serious pressure.
Chart of S&P 500 with 5-Day Historical Range Overlaid with BTCUSD and TLRY (Daily)
Chart Created on Tradingview Platform
Though there is a serious contrast in certain risk-sensitive markets to consider heading into the new trading week, there is an undercurrent of speculative reach that comes through it all. Record highs at least at one point for each of the aforementioned tickers this past week registers a clear indulgence. This aligns to the swell in risk appetite that has grown particularly acute in 2021. I will point out again the incredible jump in Google search globally for the term ‘day trading’ that has far outstripped the post-pandemic peak last year and anything seen in the data back to 2004 when they began collecting data.
Chart of ‘Day Trading’ Search Interest Globally on Google (Daily)
Chart Created on Google Trends
The Sources of Appetite and Confidence
In seeking out the genesis for this remarkable, yet uneven, confidence; traditional fundamentals like growth and yield don’t offer the most reassuring picture. Then again, perhaps the atypical measures carry greater weight in this day-in-age. I will certainly be keeping a close eye on the markets and assets that active social trading communities are discussing most actively. From heavily shorted US stocks to cryptocurrency to cannabis stocks, it is clear that markets are ready to indulge intensive risk taking. Though, I will point out through the end of this past week, the WallStreetBets Reddit board showed the familiar SPY (the top liquidity S&P 500 ETF) in the eighth slot for most mentioned asset next to the likes of GameStop, Tilray and Tesla.
Chart of Top WallStreetBets Reddit Board Mentions (Minute)
Chart from Quiver Quantitative
While the leader board will continue to shift for the short-term attention span of peak speculative interest, it seems clear to me that risk appetite remains broadly charged by deeper currents of confidence. With the House of Representatives due to discuss the rampant and volatile risk taking among certain inexperienced traders on Thursday, it is worth arguing that the environment is particularly shaped by the liberality of stimulus from the world’s central banks and governments. Though perhaps targeting growth and financial stability, the extreme measures of support offered through massive asset programs nevertheless promotes risk taking – and in fact necessitates excess as the search for meaningful return proves a more desperate affair in a zero rate environment.
Chart of S&P 500 and Aggregate Central Bank Balance Sheets in US Dollars (Monthly)
Chart Created by John Kicklighter with Data from FRED and Bloomberg Terminal
All the Concern of Risk Underlying the Market
While there remains an artificial confidence in speculative appetite with random flare ups in various markets, I believe there will remain a concern in the backdrop that something could knock a complacent financial system off the rails. The VIX volatility index as a closely watched measure of ‘risk’ dropped to 20 (though it settled a few hundredths of a point lower) both presses a relentless crush towards complacency while registering a higher resting rate of uncertainty.
Chart of VIX Volatility Index (Daily)
Chart Created on Tradingview Platform
As willing as market participants are to indulge in the ‘risk on’ bearing behind the system, there remains a distinct recognition that these are exceptional conditions we are experiencing. On the one hand, Google search interest in ‘market bubble’ is at the highest level in 15 years and yet there was a record-breaking $58 billion influx into global equities through this past week. I will recall the result of my Twitter poll asking traders in the social outlet when they though the good times might end. The majority (56 percent) expected it to occur by the first half of this year.
Poll Gauging Respondents’ Expectations for the Next Bear Market
Poll from Twitter.com, @JohnKicklighter
The Weight of the US Dollar
Between fads and underlying conviction, I believe it is important to keep lines on the most liquid and fundamentally stubborn measures in the market. That is why I frequently follow a look at GameStop, Dogecoin or Tilray with assessment for the S&P 500. Perhaps an even more anchored measure can be found in the US Dollar. Though its reflection of growth and role as a haven may be somewhat distorted, the benchmark has been far more resistant against speculative reach than most other measures. That said, should it present a new leg lower, the implications for this global anchor could provoke response like the ECB attempting to devalue their own currency and thereby exert distortion that carries serious side effects for retaliation and market fear of manipulation.
Chart of DXY Dollar Index and Net Spec Futures Positioning (Weekly)
Chart Created by John Kicklighter with Data from CFTC
Though the Greenback is worth watching in agreement and has more than a few benchmarks worth account for heading into he new week, I see GBPUSD as a good representative of the push-pull we are dealing with. On the one hand, it is pushing highest not seen since early 2018 and on the other it is lacking for any serious moment. Data was heavy through the end of this past week between the UK GDP estimate for January sliding -2.5 percent while US consumer confidence (University of Michigan) posted an unexpected six-month low. Whether update on the US $1.9 trillion stimulus program, further disparity on growth potential in Friday PMIs or unexpected update on matters like Brexit aftermath; Cable is a reminder of the many different fundamental draws on our attention and our remarkable capacity for complacency.
Chart of GBPUSD with 20-Day Moving Average and Net Spec Futures Positioning (Daily)
Chart Created on Tradingview Platform
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