Market Risk, Sentiment & Idea Generation

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By James Helliwell

Hello traders

I hope you’ve all had a good week!

It feels to have been a fairly slow start to the new month, with equities mostly treading water since we returned following the extended bank holiday weekend in the UK. Although there was a bit of selling on Thursday on stronger-than-expected US economic data (suggesting that stimulus may be withdrawn sooner than expected), the market didn’t react too much as it anxiously awaits the jobs report later today.

For all the back-and-forth in the media debating the direction of the stock market over the past few weeks, it seems to be an environment where the more patient investors are rewarded for not getting caught up in the ebb-and-flow of the constantly evolving narrative. It seems more likely to be a case of ‘peak data’, where US investors have few new catalysts to continue the broader trend higher. With that said, there are many other opportunities in overseas equity markets such as Europe, where the economic reopening and vaccination programme was (until now) somewhat lagging the US recovery. Whilst Europe plays catch up with the US, there are still trades to be had in the rotation beneath the surface in global equities.

We could continue to extrapolate these thoughts here, but for risk of succumbing to our own narrative which may well interfere with our objective assessment of the economic reality and current trading opportunities. So to help us here, we should turn to our Checklist process.  As the report was updated for Trading Club members only last week I cannot reveal too much here just yet, but will do so in time.

What I do want to share is our Market Risk Checklist, which has weakened to a score of +1 this month. Whilst this suggests that investors should generally be rewarded for taking bullish bets in risk assets, the fact that it has fallen seems to chime with the slight hesitation that we have seen in the equities bull market in the past few days.

Here’s an hourly chart of the S&P 500 which shows this in the past few days.

Another proxy for risk sentiment can be found in the ratio of industrial sector stocks to consumer staples. This daily chart shows how the ratio has been rising (‘risk on’) for the past few months on the back of the higher positive readings that our Market Risk Checklist has provided. In the past few days, things appear to be weakening a little as the ratio could not muster much of a continuation higher after testing a new high.

Elsewhere, gold has seen a considerable run up in price since it bottomed in April on the back of rising inflation expectations as a result of the economy reopening. The question now is whether reflation is now fully priced-in, which may provide a great short entry given the negative score seen in our corresponding Checklist.

I highlighted this setup to Trading Club members in last week’s video. Since then the yellow metal has seen a rather sharp correction by nearly $50. As it is now short-term oversold, and with the jobs report later today likely to contribute volatility in rate sensitive assets, there is a chance that we could see a spike even if the fundamentals should continue to weigh on gold this month.

Time will tell how this all plays out. To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.

In the meantime, why not head over to our YouTube Channel for our latest videos which I will be bringing to you each week in 2021! As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing.

Have a great weekend,


Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.

© Copyright 2021 Lex van Dam Financial Education. Further distribution prohibited.

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