There has been a trend of selling pressure across major indices in recent weeks. With investors worried about potential stagflation, elevated volatility, and a lack of positive catalysts, there is little reason for this outlook to change. As such rallies remain an opportunity to sell.
- Elevated bond market volatility is impacting across asset classes, with risky equities sold off.
- Technical outlooks suggest that selling into strength remains the strategy on indices.
Bond markets and volatility measures flash caution for indices
Treasuries have not been a pleasant place for investors in 2022. Fears of inflation and declining growth and a tighter monetary policy from the Federal Reserve have driven significant selling pressure on bonds. The 10-year yield has gone from 1.50% close to 3.0% in the past week.
With big moves seen on bond markets in recent weeks, volatility levels have increased significantly too.
With such significant volatility and sharp moves, bond yields moving lower are not a positive for sentiment as this tends to come with risk-negative (or safe haven) trading. Decisive moves higher on yields come amidst renewing inflation fears and expectations of tighter monetary policy. This is not good for broad sentiment either. The best markets can hope for is stability in bond yields which might help to calm sentiment.
For now, though, this has generated a fear trade that has not been confined to bond markets. Equity markets are also facing elevated levels of volatility. This is understandable. The war in Ukraine, in addition to the likely significant tightening of Fed monetary policy, has played into this. However, there is also latterly the resurgence of COVID in China which is impacting. With its Zero COVID policy, the authorities in China are re-imposing stringent lockdown measures. These will hamper demand and increase supply constraints.
The VIX Index (of S&P 500 options) has spiked higher again. The VIX increases as options traders clamour to buy short protection for portfolios. Although the VIX has dropped slightly today (as indices have rebounded), it is too early to suggest there is a decisive turn lower.
As such we would still be very cautious about decisively backing long positions on major indices.
Indices are a sell into strength
Indices have struggled since late March. An unwinding rally faltered towards the end of March and ever since indices have been selling into strength. The higher risk indices such as NASDAQ (negatively impacted by a weighting of high growth, expensive tech stocks) and the DAX (high weighting in manufacturing and exports, proximity to the war) have continued to suffer. In contrast, is the FTSE 100 (a high weighting in value stocks and commodities) and to a lesser extent, the Dow have performed better.
We continue to see the NASDAQ and DAX outperforming in recovery but underperforming in the sell-offs. Whilst today’s rally needs to be watched, there does not seem to be any serious catalyst behind the move. Unless there is a big fundamental shift in the driving forces of major markets, then it is difficult to see any sustainability in a rally on indices.
Negative technicals amid down-trending indices
Wall Street has suffered significantly in recent weeks as markets have accelerated lower. The S&P 500 futures (MT5 code: SP500ft) has dropped back towards a test of the crucial support at 4101/4138./ With a tick higher this morning, the support has held, for now. However, any hint of another failed rally would take the market back to test 4101 again.
Momentum indicators are negatively configured to suggest that rallies remain a chance to sell There is key mid-range resistance now between 4355/4385.
This support has already been breached on the NASDAQ 100 futures (MT5 code: NAS100ft). Yesterday’s close below 12,940 looks to be an important signal, especially considering the consistent negative configuration on momentum indicators. There is mid-range resistance around 13,700/13,880 which is a key overhead barrier now.
Over in Europe, the situation is not quite as bearish, but downside potential is still preferred. On the German DAX (MT5 code: GER40) the breakdown below 13,855/13,885 was a key move yesterday. Given the confirmed corrective configuration on the RSI, this confirms a strategy of selling into strength.
Although the market has rebounded today, this move is unlikely to be sustained. We would look to use the resistance between 13,855/and 14,030 for selling opportunities now. A rebound towards the downtrend could be seen (currently around 14,500), however, near-term rallies are a chance to sell.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
