Learn How to Trade the Markets in December?
As we head into Xmas, let’s try and lay out where the herd has ended up. There is little doubt that the fixed income world has now moved towards an imminent 3% on the 10 year. As a result, the equity world has rushed to close out it’s underweight in financials. The Trump reflation trade is on as cyclicals tear the defensives apart. Position unwinding post the Election has been ferocious enough to put every equity bear into a career ending spot. Many may not last till Xmas. The latest Saudi cuts have ensured a new base for Crude oil, possibly above $50. Chatter on China has probably hit all-time lows so the Chinese currency moves no longer matter. European equities are the new value play as the market shrugs off Italy like it’s irrelevant. What else? Yes, Gold. Who cares. It’s a barbarous relic when rates are going up and equities are rocking. Have we left anything else out from the consensus corner on the 12th of Dec? Think that’s pretty much it...
So we have two options now. The first one is the easy one. Grab the consensus trade and run with it. It’s the new paradigm. Doyens of the financial industry are suggesting that the Trump administration will usher in the most profound regulatory/tax changes seen in the last 45 years. We are going to apparently witness a very substantial reversal in regulations of all types. It’s going to be yuuuggge. And when you have changes like this, it’s going to drive GDP higher, make the US a more friendly place for foreign capital and we will see significantly accelerated growth. Sounds awesome. And it sounds right. Because the market believes it. And if you don’t believe it, it’s now become a huge career risk for you. This option is now the easy option. And you’d be nuts to fight it. But today, we lay out the “other” option. The less palatable one.
Here’s a chart pattern that could be in play for the S&P. It’s a take from left field as quite frankly, following the consensus is rather boring. There’s no “-ia” in it. However, there is one interpretation which has “euphor-ia” writ large. Take a look at the chart below. We’ve mapped the Daily chart from the Feb low of 2016, shaded in blue. We noticed something interesting. This could be (emphasis on “could be”) an Ending Diagonal. Now we are no fans of Elliott waves but this is a five wave construction with the final wave E playing out. And typical of final waves, they are often marked with a clash of both euphoria and paranoia. Sounds familiar for the current market? It sure does. Price as you can see, has come back into the shaded area. The next big move of importance will come when price gets out of this shaded area.
Things to watch:
• The upper trend line is going to be hard for the S&P to penetrate and hold above. It’s close to it now so it’s a dramatic period coming up. What happens if the pattern breaks down over the next few days?
• A break in the S&P cannot possibly happen with the way the financials , energy, industrials, materials and transports are trading. But look at the chart on the right. This is the XLF with its 200 DMA in blue beneath it. Price has never been this far away from its 200 DMA on the upside for the last 20 years! Maybe it’s a new paradigm. But Mean Reversion can be menacing. Watch out for precisely that now.
• Crude has broken out today and that breakout looks real. Energy seems like a safe sector to be long. After all, it served its bear market from 2014 to early 2016.
• Finally, pay attention to the NASDAQ. Why is the NDX lagging? It’s still below its Oct high. Confusing.
Source Data: Bloomberg, Company Accounts, Third Party Industry Research. Author: Ashwani Mathur
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