Autumn overview of the markets
The last few weeks have been characterized by a significant increase in volatility on all markets and at the same time very interesting technical configurations have formed. We therefore deem it useful to take stock of many of the markets we follow in order to obtain operational insights. We start as usual from the USA.
S&P500 US stock index
Let's start by analyzing the 5-year weekly chart, with its moving averages for 10, 20, 40 periods (equivalent to 50, 100 and 200 days). The slowdown in recent weeks is appreciable and in particular the long red candle of the last week which brought the index dangerously into contact with the most important moving average, the 200-day one. The 7-period RSI oscillator is very close to the oversold 30 mark, from which the index managed to recover in May and November 2012.
The most negative technical element is the weekly close at 1906,13 which is lower than the previous July weekly relative low, which may suggest that a trend reversal pattern has started to form. Crucial will be next week's close, whether above or below the MA.
It is probable that this downward trend that is forming will fight against the seasonality of the period, which sees the last two months of the year historically report positive performances.
In this regard, let's examine the seasonality of the S&P500 index in the last ten and thirty years compared with the trend of 2014 up to today: the months with the best historical monthly performances are, in order, the months of April, December, March, July and November. In recent months the average performances both in the last 10 and in the last 30 years are positive on average. In particular, December stands out for its consistency, with an average performance of +1,93% both in the last 10 and in the last 30 years.
In 2014 the index behaved in a manner consistent with the past only in the months of March, April and January (at least in line with the negative trend of the last 10 years). It is not yet possible to say anything about October as the 2014 data refer to Friday 10/10 with only a third of the days elapsed. In our opinion, if the MM200 does not hold up and October ends in a very negative way, there could be the classic technical rebound towards the average in the last two months of the year; conversely, if in October the moving average provided yet another support, then November and December would fully unfold their seasonal potential. In both cases it is therefore probable that the year-end seasonality will be respected.
Finally, we note that some American analysts (including Chris Kimble ) report the anticipatory value of the ratio between the SPW and SPX indices (both measure the performance of the top 500 American stocks, the former weighing the securities, the latter weighing them by capitalisation). When this ratio violates trendlines, it anticipates a trend change. In mid-2007, the ratio broke the trendline that had risen since 2004. The index again made a new high and then crashed in 2008. We are in a similar situation now, with the report breaking the trendline in May. SPX then hit a new high in September. If Chris Kimble's evaluations are correct, it is a situation that could lead to a marked correction of the American market during 2015. (Oct 2014 partial data)
Eurostoxx 600 European equity index
The situation of the European index is more complicated. The 200-day moving average, already violated in the summer but promptly recovered, was violently punctured downwards in the last week, constituting a minimum now already lower than that of the beginning of August. The formation of a June – September double top, decreasing lows and a weekly close below the MM200 are symptoms of the formation of a downtrend. It is possible that the index returns to the 335 – 340 area on the occasion of the Christmas rally, but the technical conditions today are not very conducive to the search for new highs in the coming months.
After the rally in the first part of the year, the retracement of the last month has been so strong that all the European indices have returned below the levels of the beginning of the year, except for Italy, Spain and Switzerland. The German Dax index is black.
Bond market
The leading index in this sector is, as always, the American ten-year index. We have mentioned many times how this is the most solid and reliable secular trend of all. As long as the rate remains within the channel, we will not be authorized to speak of a reversal of the declining trend. This was the main reason why at the end of last year, when the 3-year bond hit XNUMX%, we decided to maintain the bond exposure against the prevailing opinion that spoke of the end of the cycle. Since then the rate has declined moderately allowing another excellent year for bond portfolios.
In reality, there are now many expectations for a US rate hike, and since July they have poured into the dollar, which has been largely bought, but Janet Yellen hastened to affirm that if necessary, rates can remain low in time open-ended and this last week cooled the dollar while strengthening the T-note.
On the European front, government bonds were of little interest, a modest increase in credit spreads was determined which led the price of some high-yields to drop to more interesting minimum levels. The European inflation just above zero and the Italian one decidedly at zero make the purchase of inflation-linked securities with a logic of accumulation an investment that requires great patience but certainly, even if not an exciting result. International tensions linked to the Middle East and Ebola and the consequent search for security will contribute to maintaining high investment grade bond prices.
EUR/USD exchange
As further confirmation that the long-term trendlines are the most robust, even the EUR/USD exchange rate, at its umpteenth test of dynamic resistance, has taken the lift downwards. It was a long-awaited movement, it took a little longer than necessary and some uncertainty in the 1,40 area but in the end the movement did not catch us unprepared and all portfolios benefited from it.
Having reached the first target of 1,25 at the 2008/09 lows, and after an obvious pause to re-approach the moving averages, the second target of 1,20 now appears within reach. From there, new scenarios will open up that we will analyze in due course. Right now the area 1,28 – 1,30 is an area for buying more dollars.
Gold
The support just below the $1200/ounce level acted as a barrier and created a triple minimum situation which considerably strengthens it. Observing the futures positions of the producers, it is clear that in the 1200 area offers are becoming rarer and vice versa, purchases probably coming from Emerging Countries are increasing.
Other foreign currencies
The modest bond yield makes it essential to continue the currency diversification already started profitably in the last year. The most interesting currency crosses for an investor in Euros are: Brazilian Real, Mexican Peso, Australian Dollar, British Pound.
Conclusions
After a positive and serene first part of the year for almost all asset classes, autumn brought a wave of uncertainty. The trend in the last few months of the year will tell us what direction 2015 will take. For the moment, we remain in favor of investments in dollars, currency diversification, carefully selected high-yield bonds, inflation-linked bonds and generating extra returns through credit linked and equity linked certificates.
Attachments: Autumn market overview.pdf
