Am I stating the obvious? Risk is on! - Thomas Ng 3 Feb 2023
On Sunday 5 Feb 2023 8.17pm, I emailed Clients my latest post titled 'Am I stating the obvious? Risk is on!'.
Below is the full transcript for your perusal:
Happy Lunar New Year! Thank you for your patience as I prepare my monthly writeup.
New year opening luncheons with associates and back-to-back meetings with Clients, plus a renewed interest in global risk assets. Phew! This year's kicking off to be an exciting and fulfilling year!
1) On 19 Dec 2022, here's what i said for the S&P500 Index (aka SPX or Mr Market) on the 'Technical Analysis' front: '..I must admit the line of least resistance is down, short term wise..' '..To be clear, (beyond a short term pullback) my bias is still towards a bullish outcome over the next few months..' . Ref: https://tinyurl.com/expectweakness . What happened then? From 19 Dec, Mr Market obliged me sweetly and slid down further to a low of 3764 before initiating a 1.5-months long rally to close up 8.4%. . . 2) On 25 Jul 2022, the following is what I mentioned for the 'Macro' front: '..The falling commodities prices are likely to feed down into weaker inflation numbers in the months to come. Coupled with inflation numbers 'base effects' (it's just pure Maths!), it is likely the FED may become less pressured to hike rates at such an aggressive pace. . In any case, the 2022 record rate hikes are just giving what the FED truly needs to achieve its dual mandate***, i.e. it now has the 'runway' to CUT rates should inflation numbers turn out to be less threatening.The FED signalling their less hawkish stance is likely key to effect a sea-change of narrative later & then possibly re-igniting the next intermediate term bull market. ***Dual mandate of the FED refers to 'maximum employment & stable prices..' . Ref: https://tinyurl.com/mybullishscript25jul . What happened then? I reckon you can probably agree 're-igniting the next intermediate term bull market' is already underway now and gathering further traction. . And in the 1st FOMC meeting of the year on 1 Feb 2023, Powell said: '..If we feel like we’ve gone too far, and inflation is coming down faster than we expect, then we have tools that would work on that..' . Wow, did Powell just hint that the tools that he might have is that 'runway to cut rates'? I wonder, wonder, wonder.. . .
3) So what's next? Long time Clients know how I love the bullish 'Cup & Handle' Chart Pattern! After missing its absence for most of 2022, we may just have one shaping right up in SPX. . I'll keep the long story short - pls see now attached below Chart 1 of the S&P500 Index (SPX) chart. If we see a sustained breakout roughly above the 4105 level, then we should look forward to a bullish (purple) Cup & Handle Pattern implied target of 4440+/-. Of course, as usual the backtest must hold, ie price action going forward should not break back BELOW the bold red downtrend line.
Chart 1 - S&P500 Index (SPX) Daily Chart, 13-mth
. 4) Seven more technical factors to add to the Risk-on bias: 1. SPX price action has for the 1st time since Jan 2022 broke up authoritatively out of the 2022 red downtrend channel. . 2. SPX's 50-day blue EMA is about to cross above the red 200-day EMA. This is also known as the bullish 'Golden Cross' which historically signifies a more bullish setup for markets moving forward. . 3. SPX Bullish Percent Index (aka market breadth) - overall 'bullish sentiment' has improved markedly, with the number of component stocks in SPX on bullish “buy” signals rising to the highest since March 2022. . 4. QQQ (Nasdaq 100 ETF) is sporting a potential Double Bottom pattern with a breakout on 1 Feb. As with all breakouts, the backtest must hold. . 5. The Crypto complex is starting to stir which implies a stronger risk-on environment. . 6. Even Hang Seng Index (HSI) appears to be preparing a bullish inverse Head & Shoulders Pattern which if triggered at neckline 22,608+/- will point to a pattern-implied target of 30,435+/-. That's a 36% upside from the neckline. Phew! . 7. Lastly & perhaps most importantly: As other currency majors caught a bid, the USD (index) continues to weaken which historically ushers in a risk-on environment and is most beneficial for emerging markets currencies and equities. I spoke about this in my 19 Dec writeup which you can read more here: https://tinyurl.com/expectweakness . I didn't attach any charts for the above 1 to 6 points but will be happy to send them to Clients if you could drop me a line. . As for point 7, I've attached below an updated Chart 2 of TNX (US 10-year bond yield) & DXY (USD Index) vs the TLT, GLD, SPX, NDX, ARKK & BTC dated 2 Feb 2023 which you can see how risk assets rally while the USD & the 10--year bond yields eases off. . On a side note, seasoned investors & traders might have noticed Friday 3 Feb's weakness in SPX (down 1.03%) might have been caused by a corresponding 1.23% gain on the USD Index!
Chart 2 - TNX (US 10-year bond yield) & DXY (USD Index) vs TLT, GLD, SPX, NDX, ARKK & BTC dated 2 Feb 2023
. Conclusion in Layman's Terms: I'm probably stating the obvious but risk is on so far in 2023. The breakout in the Cup & Handle Pattern in SPX will likely target 4440+/- in the next few months. Look to buy the dips. Of course, as with all bullish setups, the backtest must hold, i.e. SPX price action now should not break BELOW the bold red downtrend line and re-enter into the 2022 downtrend channel. As for what stocks & ETFs to buy, you know who to buzz! . Oh there's one more thing, while waiting for investment opportunities, Clients with excess funds looking for good yields BUT do not want to be locked up with T-bills or Fixed Deposits may wish to consider Phillip Smart Park which is a SGD & USD money market fund. . The Phillip Money Market funds for SGD & USD is yielding 3.16% pa & 3.37% pa respectively.** **Rates updated as of 30 January 2023. Return (7 Day) Annualised . More info on Smart Park here & below: https://smart.poems.com.sg/smartpark . As usual, Live Long & Trade Well! . Thank you & regards . Thomas Ng, CMT Principal Trading Representative 首席股票经纪 www.thom-ng.com . #plsreaddisclaimer #chartforillustrationonly #spx3feb23 #riskon #TNX #DXY #FEDpivot #runway #Chinareopening #befluid #wytant #livelongandtradewell Chart source: tradingview Image source: thestreet.com/markets/what-do-we-mean-by-risk-on-and-risk-off-14796681'