Hi everyone,
I remember when I used to start these blog posts by saying that “I hope you had a great week” (as I still do hope!). However, as we still find ourselves in challenging times, I feel that wishes for safety and happiness are more appropriate in this ‘new normal’.
For most of us our priorities will have changed materially in recent weeks, which is becoming apparent in the economic data that we track. However, a quick glance at the S&P 500 - which is closer to a new all-time high than the recent low - suggests that investor’s priorities have yet to change. According to our Checklist process, I fear that sustained optimism in risk assets may be misguided as many of the scores are in conflict with what the consensus is doing. Let me share a few thoughts from this week's Trading Club video with you here, featuring these setups along with the other action in currencies and commodities.
We’ll begin with our Market Risk Checklist, which has remained negative for successive months. When we updated the score heading in to April this suggested that risk markets (such as stocks and oil) may remain under pressure relative to safer bets (such as gold and the yen).
This is just the starting point for our process and we still need to evaluate each of the individual market Checklists for confirmation, but on the whole the following ratio of the relative performance between Industrials and Consumer Staples stocks as a general gauge of risk appetite has been under pressure and provided two ‘overbought' setups to potentially sell in to this month.
The broader business cycle is also at risk of turning negative as we expect our Checklist to reflect when we update it in our new monthly report next week. Since producing this at the end of March, a few of the indicators we track have deteriorated further which suggests this will be inevitable without improvement elsewhere.
So far, this doesn’t seem to support the recent buying we have witnessed in equities. But what about our individual Checklist for the equity market? With a score of zero, theres no obvious reason to be found here either.
Though critics may say that the zero reading has proved to be ‘wrong’ at first glance, upon closer inspection there have been several profitable setups in trading the range this month - precisely how we interpret a neutral reading at the Academy. With the Checklist being updated in the final week of March, our process captured the sell-off from the first ‘overbought’ RSI just before the 31st which resulted in a 200 point move lower in the S&P 500 futures. Having covered on the ‘oversold’ RSI level, our neutral score suggested that we could look to trade the range again, this time with a long. You may have closed that another 200 points higher in the first week of April, and reversed short. Although this third trade would have likely resulted in a loss, there was another profitable short setup to be captured on the 17th, which saw the market head around 100 points lower at the time we show here. In summary, a score of ‘0’ can be as helpful to our trading as a clear directional score (+/-) with the right application.
With my take on the equity market now clear, I want to share a few of the setups that we have found in FX this month with our various currency Checklists. The table below summarises the scores for each of the major currencies we track. Lets begin with the US dollar, which has a broadly neutral score of +0.5.
All eyes have been on the greenback in recent weeks, and Trading Club members have remained ahead of the consensus to benefit from two oversold setups since this month’s report was produced in the final week of March. Similar to the approach taken in equities, a score of +0.5 here again favoured trading the range - but this time only from the long side. Each of these setups proved to be profitable. The first went from 98.50 to 100 on the DXY around the beginning of the month, and the second from 99 to 100 again around mid-month. Yet again, our process identified these great setups and trade efficiently when the odds were tilted in our favour.
The pound proved to be a little trickier in practice, but with a score of -4 looked like a clear short. Having seen an initial sell-off from 1.25 to 1.23 at the beginning of the month, sterling did manage to recover and record a new high around 1.26 which provided a high conviction short setup and resulted in a second slide back towards 1.23.
The Euro also had a clear negative bias this month with a score of -3. This helped us realise the first short from around 1.11 all the way down to 1.08, before a second setup appeared between 1.09-10 (depending on your entry) and resulted in a similar sell-off towards 1.08 again.
There wasn’t much action in USDJPY, as expected given the generally neutral scores for both sides of the pair (though some may have taken a slight long bias towards buying USDJPY, with the dollar a +0.5). Either way, what played out on the screen was exactly what our Checklists suggested.
Given the week we’ve had, it wouldn’t be right to end here without featuring crude oil. Our Checklist remained negative this month, having correctly anticipated the weakening seen previously in WTI. However, even with economic activity, supply and inventories all scoring negatively, nobody could have anticipated the magnitude of what happened next ...
The rest as they say, is history. As traders we are always looking ahead in order to anticipate what is likely to happen next, and there has already been enough press coverage of the collapse in the May and June futures for me to need to add anything here. Its simply a magnificent chart, and a reminder to always expect the unexpected in markets - though in our case, the direction was anything but unexpected thanks to our Checklist providing a reading of -2.5 as crude broke below $20...
Hopefully you found my roundup of this month’s trading interesting, and can see the importance of trading with a proven process as professional investors including myself and Lex do. On this basis, I think you’ll agree that the equity market may well be misguided in its recent optimism, and investors may well be about to shift their priorities from the Fear Of Missing Out (‘FOMO’) to fear of losing everything in the unfolding crisis.
If you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to lexvandam.com and take your financial knowledge to the next level right away!
Wishing you a safe and pleasant weekend,
James
