So the much anticipated Jackson Hole symposium is over and believe it or not, the wheels did not fall off. Fed chair Jerome Powell was rather dovish in fact. Although he said that the process to begin tapering can begin, he also implied that there is not set (or anticipated) start date. Thus the market infers that there will be no tapering until November. In the meantime, the delta-variant of the covid-19 virus still poses the most immediate risk in the form of further global lockdowns and supply chain disruptions. It seems that the central bankers will remain ‘accommodating’ until they feel this threat is no longer a threat. Apologies to the next generation that has to foot the bill.
Offshore trade ideas
S&P 500 (SPY)
The wedge that keeps on rising…
This is a purposely bearish view on the S&P 500 index. That rising wedge is something that the Elves could sing songs about. That said (or sung), the chart did make a new high at the close on Friday on the back of dovish stimulus commentary. If you are a trend follower, there is nothing by clear skies ahead on the long here. Can unforeseen shocks derail the market and lead to a large-scale correction? Sure. Will it happen before the end of the year? Toss a coin. In the meantime, sit tight and follow the trend. The major signal here for the bears will be once the bottom of this price formation is broken.
Russell 2000 (IWM)
Small caps put in a decent bounce last week, but IWM is still stuck in its range. At present, when comparing almost any valuation metric of small caps vs large caps, small caps are at decade highs in terms of ‘value’ compared to large cap indices. So this range bound IWM, while SPY is making new highs, has created a bit of a relative value distortion. This, in our view, can lead to one of two probable scenarios. First, small caps are the ‘leaders’ and when they break down the larger market is sure to follow. Second, small caps finally wake up and smell the ‘risk-on’ and rally hard to catch up to large caps. We’re open to both ideas.
Brent Crude Oil
Oil (and energy in general) is still looking very attractive to us. We heard over the weekend that the 400k BPD production increased agreed on in the previous OPEC+ meeting may be reconsidered in the upcoming meeting on Wednesday. No doubt due to higher delta-variant infection rates and thus a reduced demand forecast. Nonetheless, we are looking forward to new highs.
The weekly hammer candle formation on Gold is holding up well. At present, Gold is lagging behind 10Y US Treasuries. Either yields have to rise, or Gold needs to rise to close the gap. We think Gold will be the mover. The weekly chart looks rather good from a technical perspective as well. It’s been a long bumpy ride for bulls so far in 2021, but heading into the end of the year it is looking like the bulls might catch a break.
U.S. Dollar Index (DXY)
DXY did not manage to stay above the magical $93 level. Looks like most of the market is now expecting tapering to start in November only, which likely means that DXY could weaken somewhat for the next 2 or so months. Keep in mind that correlation… DXY down, commodities up. This could be good for the ‘reflation trade’.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
We might have a perfect storm situation for oil next week. XOP has broken its recent downtrend and could be set up to benefit from bullish price action in the oil space.
VanEck Vectors Oil Services ETF (OIH)
OIH is another decent oil play and has also given a technical buy signal.
North Shore Global Uranium Mining ETF (URNM)
Our last energy related chart for the week. Although we have many more, we don’t want to sound like a one trick pony (even if it is a fairly decent trick). The fundamental story is a little long to get into here, but overall our bullish view on the energy sector is one that we’ve been trumping on about for many months now. URNM has pulled back some and offered a decent entry point for trend followers. It also generated a technical buy signal.
VanEck Vectors Gold Miners ETF (GDX)
Our comments on Gold above refer. GDX might be a decent play from here. Not only is Gold lagging 10Y Treasuries, GDX is lagging Gold. Could be a sitter. Nice clear stop loss also.
South African trade ideas
JSE Top 40 Index (ALSI)
Oh look at that, it’s a small cap index stuck in a range… oh wait, no it’s the ALSI. So it is a small cap index stuck in a range…
There is no clear signal here at the moment. The last time it gave a confirmed signal, it reversed two days later and crumbled back to the bottom of the range. So for now, patience.
Anglo American PLC (AGL)
Some DXY weakness and a little bit of ‘risk-on’ and AGL might just go close that gap.
Coronation Fund Managers (CML)
CML held the channel last week. It was looking pretty dire at one point, but R48 held and CML put in the bounce. Perhaps it can get back to establishing a new uptrend now?
Want ideas, insights and research?
*Please note that these trade ideas form part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.