Just a tantrum, or a trend change?

Well would you look at that!? Monday night 21:51 and the S&P 500 is looking like it will close below the 200 day moving average for the first time in 18 months! It has not retraced this much, and this fast since the infamous COVID-crash. The question is; is this just a tantrum, or a trend change? To be fair, a case can be made for both and honestly right now I think (at least for me) it is too early to tell.

Last week I discussed some of the macro ideas and themes that I think are likely to drive markets in 2022. So to build on one of the views expressed last week – being that the Fed is likely to be slightly more dovish that expected in order to avoid panic. Wednesday brings an interest rate decision by the Fed the market is expecting the first hike in March. The bull case for equities here is that the Fed pushed back the interest rate hike by a few months and that lights the firecracker that shoots equities to new highs. Strong opinions, weakly held… let’s see how the week turns out.

Housing inflation, construction starts and lumber

Much of the upward inflation pressure is borne from rental inflation in the housing market. Housing makes up about 42% of the CPI basket in the US and thus any price changes in the housing market is going to feed through to inflation in a big way. We’ve seen over the last few months (perhaps a little longer) that home prices (and rental) have increased rather significantly in the US. Like all markets, housing is driven by supply and demand.. and supply is rather tight at the moment. So tight in fact, it is near the lowest it has been, ever (as shown in the chart below).


source: tradingeconomics.com

On the flip side though, demand has been robust, which of course has led higher home prices (and also the fastest year-on-year increase in home prices ever).

This has led to a large increase in construction activity in the US. In fact, if you look at housing starts versus completions, you might notice that over the last few months more homes have begun construction than have been completed. In other words, new homes are starting to be built that what are being finished.

New Privately Owned Housing Starts in the United States by Purpose of Construction, Built for Sale Total One-Family Units


source: tradingeconomics.com

New Privately Owned Housing Completions in the United States, Total One-Family Units


source: tradingeconomics.com

It might not be that obvious from the charts above, but what is happening is that the market is responding very well to the shortage of homes in the US. This tells us a few things. First, construction is a booming industry the US right now… also that with more supply coming into the pipeline, the housing shortage will likely ease in coming quarters and thus, inflation will ease along with it (think; Fed might not need to be so aggressive with rate hikes after all?). We can also assume that with all this private home building, we might see lumber prices put in a bit of a rally again. Some food for thought.

Gold

Last year I pointed out a very large triangle formation on gold. It gave a fake signal which caught me out a little, although after some re-jigging of the trend lines it appears to be setting up for a large move. This could potentially be a bit of a bear case, considering that gold rallies when equities melt. So take it with a pinch of salt and keep in mind that (especially since we have the Fed on Wednesday) the future is hard to tell. Should we see gold break out here though, there could be lots and lots of upside on the local gold counters.

S&P 500 (SPY)

The magic of trend lines… and a glorious break of one! As I mentioned earlier, this is the first time that the S&P 500 (and other headline US indices) is properly below the 200 day moving average since the COVID-crash. It looks and feels (and smells) a lot like the start of the move we saw 18 months ago, although this time it could be abruptly stopped by a move dovish that expected Fed. Seeing as it is my expectation for the Fed to give us a dovish surprise, I have been nibbling some long here. That said, it is a loosely held view and a small position with limited risk.

S&P 500 Volatility Index (VIX)

Another limited risk way to express a bullish view would be so buy some VIX puts. Earlier today (Monday) the February 8th 29 strike PUT was trading at $4.17. Limited downside of $417 per contract, and a furious bounce in equities spurred on by the Fed could see the VIX come down to around 21 (maybe lower), making for a decent 1:2 risk-reward.

DB ETC PLC XTRACKERS PHYSICAL RHODIUM ETC (XRHO)

XRHO is the most recent addition to our managed offshore portfolios. The chart looks great! Fundamentally I think the backdrop is decent too. Recently SUV sales growth has been outpacing EV sales growth. There might be a bit more demand for catalytic converters than we think (also good for oil demand, but more on that another time).

That’s all folks

That’s all we have for you this week. If you would like more insights and trade ideas, consider opening a trading account with us and joining our community. We work really hard to add value for our clients by giving them information, analysis and guidance. We also offer some very competitive rates on trade executions and have accounts that are suited for very active, semi-professional and intraday traders. Give us a call or drop us an email if you would like more information.

*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.

Post Index

Search the blogs

Share this post

Every week needs a new plan!

Markets change all the time. New fundamental drivers emerge, technical setups mature or fail and our trading plan must adjust in order to keep up with the ever changing environment. Every week we highlight some of the trade ideas that are generated within our client community so that you can stay on top of what we're looking out for and planning to trade at the beginning of each week. 

Sign up to get notifications each time we post trade ideas, insights and analysis to our blog.

Scroll to Top

Need some help?

Please provide your contact details so that we can be in touch.

Your message is on its way to us!

We will be in touch with you shortly.

In the meantime, check out our other pages with the drop down below:

We really appreciate you reaching out. We will be in touch with you within two business days.