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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Death cross signals further downside
A glance at the above chart of the FTSE 100 shows it has been a strong week, with the index gaining almost 350 points since Friday’s speech by Ben Bernanke, chairman of the US Federal Reserve.
Bernanke did not announce any new stimulus measures at the Jackson Hole central banker’s summit last week, but left the door open for additional assistance should conditions deteriorate. The speech reassured the market that there were still levers left to pull and that the Fed would have an extended discussion at its September meeting, offering renewed hope that an announcement may follow.
News of merger talks between Greece’s second and third largest banks combined with a report that Qatar will buy a 17% stake in the new bank boosted sentiment towards the fragile sector. The stake building echoed their purchase of Barclays shares at the height of the financial crisis in 2008, sending the Greek equity index up more than 14%, the biggest daily move since the 1980’s.
Mixed economic data provided a reminder of the uncertain macro-economic climate, as a slowing economy, debt concerns and uncertain remedial action from politicians dent confidence. The US Conference Board’s index of consumer confidence fell to 44.5 in August from 59.2 in July, well below expectations and the lowest reading since April 2009.
Similarly in Europe, the European Commission’s economic sentiment indicator fell to 98.3 last month from 103 in July, the biggest drop since 2008. US private sector job growth also slowed faster than feared in August, intensifying concerns over Friday’s key non-farm payrolls report.
US factory orders however rose strongly in July, climbing 2.4%, the largest increase since March. The rise follows a decline of 0.4% in June, providing a reminder that growth is merely slowing and does not necessarily mean a recession is unavoidable.
Technical analysis highlights the recent volatility with the index bouncing between psychological support at 5000 and historical resistance at 5400. Having been extremely oversold the oscillators have been trending higher over the past three weeks, suggesting an improvement in momentum. Given the acute rise they are already nearing overbought conditions and the strength does not look sustainable.
It is also worth considering the longer-term chart, as the “death cross” has been formed for the third time in the past decade. Previous alarm signals were in late 2000 and early 2008, both of which turned out to be strong sell signals.
The death cross is formed when both moving averages are sloping down and the 50 day moving average intersects the 200 day moving average to the downside, highlighted on each occasion by a green arrow. Should the above signal be reversed a “golden cross” would indicate this was just a correction.
The below chart of the S&P 500 shows a similar outlook to the FTSE 100, with the recent formation of its third death cross in the last decade. Bearish bets by hedge funds on S&P index futures increased to the highest level since before the financial crisis in 2007, with many analysts expecting weakening US growth and debt problems in Greece to worsen over the coming months.
In conclusion, the uncertain macro-economic backdrop is causing extreme volatility and without suitable remedial policy action, I believe the issues spooking the market will deteriorate further in the short-term before improving later in the year.
Some economists question the effectiveness of QE3, given that QE2 clearly didn’t work. The slow-down looks deeper than in 2010 and the market appears to have priced in the initial euphoria anyway.
I suggest investors remain nimble, using the recent strength following Bernanke’s speech to take on short positions on the index, with a view to closing them on extreme weakness and then reversing the position.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position on the index, but client accounts may. The material in this report has come from Simply Charts.
