14th December Equity Index Overview
14th December 2009
Equity Index
Overview
Price action early last week saw equity markets sell-off from their recent high prints amid concern over government debt concerns. Greece had its debt ratings cut to BBB+ by Moody’s, and Spain was placed on credit watch negative by Standard and Poors. The state of Dubai also had its ratings downgraded. However a gradual recovery in the latter part of the week means that equity indices are finely poised going into the Christmas and New Year break.
Thoughts from the trading floor
In the early parts of last week the S&P 500 future tested supports around the 1082.75-1088.00 area. This area has been the lows of a horizontal channel that has contained the market since mid-November (albeit a brief spike lower during Thanksgiving due to the Dubai debt crises). The market has recovered from these levels and today the market is again retesting horizontal channel resistance. This is the 1113.00-1119.00 area. Much of the focus will be on the 1121.50 level on the S&P 500 cash index, which represents the 50% retracement of the market’s losses from its 2007 peak. A break above here may signal a strong push higher going into the holiday period. For the Dax future, 5921.0 is the 50% retracement from its 2007 highs.
Lately, since the release of the US Employment situation report at the start of this month, we have observed that the USD has strengthened on the back of good macro-economic data from the US. This price action tends to cap gains on equity markets following the release, however the strength of the correlation between the USD and equity markets has waned. Commodity markets have maintained a strong correlation with the USD. Thus if markets are viewed as a function of ‘risk on or risk off’, with USD strength translating to lower commodity and equity markets (risk off) and vice-versa, one could say that equity markets are in overbought territory at the moment. These types of price discrepancies tend to occur close to holiday periods, when market volumes are thin. With respect to this, we would retain a bearish skew on equity markets as long as the USD remains well supported. Therefore, Wednesday’s FOMC policy decision may be very important for the short-term outlook of the USD.
Bull view
Bulls will hope that the markets can break key up-side resistance, the 1121.50 for S&P 500 cash index. A break above here may result in a strong bout of covering by shorts resulting in a strong surge higher going into the holiday period. They will cite today’s news of the bailout of Dubai as an important step towards removing some of the recent market jitters concerning a global Government debt crisis.
Bear view
Bears will feel that the strength of the USD and the air of uncertainty should provide a natural cap for equity markets. They will feel confident that the recent high prints in the S&P, 1113.00-1120.0 will hold, however may have to wait until the New Year for their shorts to come good. They will also anxiously eye Wednesday’s FOMC policy decision for the short-term outlook of the USD.
Futex view
We continue to back the bears as long as the USD remains well supported. We favour the recent high prints in equity markets to hold and see the current ‘mispricing’ in equity markets against commodities and the USD as a good selling opportunity for equities.
