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S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

John Kicklighter, Chief Strategist

S&P 500, Fed Fund Futures, AUDUSD and GBPUSD Talking Points:

  • Though the prevailing trend in risk-leaning assets is bullish going back the past year and decade, that doesn’t make a return to pace easy for the likes of the S&P 500
  • Taper fears remain as markets dispute central bank forecasts, Reddit interests seemed to hit the news with RKT and officials from the two largest economies posted bubble warnings
  • While I am most concerned about risk trends, scheduled discreet event risk is heaviest for the UK with the budget update, AUD on GDP and USD with the ISM services
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So Much for a Full Restoration of Risk Trends…But Reddit Interests are Flaring Up

We started this week (and month) with a broad bid in risk-leaning assets that roused many bulls’ hopes that the markets would return to the prevailing bull trend of the past year. Unfortunately for those looking for conviction, we would see the effort fall apart before we could even overtake interim resistance. That is not an overhead like a record high on the major US indices. Rather, it was simply clearing the upper bound on congestion from the past few weeks of congestion. For the S&P 500, the ceiling is a thin but prominent trendline resistance roughly around 3,910. I will be watching this benchmark in particular for guidelines for conviction going forward with a break of either 3,910 or 3,800 a first step to picking a direction for this predisposed bullish icon. Yet, for taking the true temperature of the market, the broad performance of the various assets with a sentiment connection will stand as a better gauge for confidence.

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Chart of S&P 500 with 50-Day Mov Avg (Daily)

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

Chart Created on Tradingview Platform

Heading into Wednesday trade, I find many of the unrelated risk benchmarks that are on my regular watchlist – global indices, emerging market measures, junk bond ETFs and speculative commodities are comfortably within the range established over the past three to four weeks. Yet, the undercurrent won’t necessarily reign in all corners of the market. One prominent spark this past session was in the crosshairs of the WallStreetBets Reddit board. While GameStop – the stock at the center of January’s vigilante short squeeze effort – was top mention still, the newcomer RKT (Rocket Companies) was the heavily discussed name that was seeing extraordinary market movement. The online mortgage company that IPOed in August experienced a 71 percent charge this past session with the market naturally focusing on the approximate 45 percent equivalent short interest in the stock. This reads like the GME swell in January, but there are is far less groundswell in other names and the backdrop for risk appetite is uneven. It will likely be difficult to keep this kind of charge going much less encourage the broader market to join in the on the enthusiasm.

Chart of Global Google Search for ‘Market Bubble’ and ‘Buy the Dip’ (Weekly)

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

Chart Created by John Kicklighter with Data from Google Trends

The Critical Themes for Sentiment: Sheer Speculative Bias Or Tangible Returns?

As I look for what will motivate the markets on their next leg – whether higher or lower – I am placing greater consequence on the intangibles of speculative bias rather than the overt fundamental catalysts or even themes like the resurgence in government bond yields. That means that the sheer will of the masses can drive ‘risk on’ or ‘risk off’ with the fundamental justification sought after the collective mind is already made up. While direction of the key assets mentioned above is an important measure, I feel it is also important to keep tabs on critical habits and appetites like the search interest in ‘day trading’. That can be somewhat innocuous, but the record search for ‘buy the dip’, ‘market bubble’ or ‘penny stocks’ gives serious context to our situation.

Chart of Global Google Search for ‘Penny Stocks’ and ‘Day Trading’ (Weekly)

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

Chart Created by John Kicklighter with Data from Google Trends

For a more traditional fundamental heft, my attention, I’m sure like many others’, will still be set on global government bond yields. While there were a few developed world economies who saw a further pullback in the February multi-month high in 10-year tenors, most had leveled out. Japanese JGB and the UK’s Gilt yields were prime examples. It is the US 10-year Treasury though that most are tracking. Technical traders would have recognized an ‘inside day’ which kept the market above 1.39. There is another way of looking at what these sovereign yields insinuate. Once again, I’m returning to Fed Fund futures to illustrate what the markets are forecasting for rates against what the Fed is projecting. This isn’t the first time the two sides vehemently dispute the others’ perspective.

Chart of S&P 500 Overlaid with Fed Fund Futures Yield Projection to Dec 2022 (Daily)

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

Chart Created on Tradingview Platform

A Few Dollar-Based Majors With All the Fundamental Heft: EURUSD, AUDUSD and GBPUSD

For scheduled event risk ahead, there is plenty to digest on the economic docket. First and foremost, the US Dollar will take in one the most useful, leading indicators to given insight on the economy’s health that we have on the docket: the ISM service sector report. There are few single measures that are as comprehensive and timely a view on the world’s largest economy as this series. Given the manufacturing figure hit a multi-year high on Monday, there is capacity for this figure to best expectations and potentially lift risk appetite further. The greatest impact though would be a comparable disappointment. While the Dow’s reaction will be on my mind, the Dollar’s response will be more likely a respondent for market activity. If the Greenback can be spurred to action, EURUSD has general levels of 1.2200 and 1.2000 that could urge some follow through.

Chart of EURUSD with 50 and 100-Day Moving Average (Daily)

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

Chart Created on Tradingview Platform

Another put-upon cross with a Dollar base is AUDUSD. Retail FX trader interest (measured via IG) hit its highest net long position in well over a year with the hold at the end of last at the 50-day moving average / trendline combo down around 0.7700. That bullish interest has flagged a little with the recent rebound, but there seems considerable interest. That makes sense as the RBA yesterday reassured its dovish position (though that didn’t curb the bounce) and the 4Q Aussie GDP figure registered a stronger 3.1 percent growth through the past quarter. Tomorrow, we have the Australian trade balance and the start of China’s NPC Two Sessions to carry the event risk torch forward.

Chart of AUDUSD with 50 Moving Average (Daily)

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

Chart Created on Tradingview Platform

Finally, for sheer density of economic calendar, GBPUSD (or Cable) is the most potent staging. Acting as a comparable comparison to the ISM service sector report out of the US, the OBR (Office for Budget Responsibility) is due to release its 2021 budget with commensurate economic forecasts. Given the pandemic response through the country, this will be watched closely for effectiveness and perceived pacing of the UK’s recovery. If there is a strong contrast between the two countries’ data, it could render a more volatile move. If they ‘conflict’ for attention, it could be a ‘lightning in a bottle’ scenario for volatility with no critical direction.

Chart of GBPUSD with 50 and 100-Day Moving Averages, COT and 20-Day ATR (Daily)

S&P 500 Checks Lower as Reddit Traders Return, GBPUSD and AUDUSD Top Watch

Chart Created on Tradingview Platform

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