The markets are feeling the summer warmth and have turned positive as the water temperature grinds higher in East Hampton Beach. Will the stock market remain in positive territory? And what about correlated markets? Will trend extension in key markets continue to propel certain hedge fund strategies? A Goldman Sachs report looks at the technical variables across a market spread, wondering if the British pound continues to run scared after Brexit or key markets including gold witness trend extension.
What’s the more important performance driver / indicator: S&P 500 or British Pound?
It’s tempting to consider the stock market’s breakout as the key variable in this week’s market. Investors ask: Is this breakout the start of a major market environment for price persistence or will mean reversion whack investors back to reality?
Goldman has opinions, noting that over the short-term stocks have started the final wave of a three-wave cycle extension. They note the “V” pricing pattern of the Brexit – a key point among algorithmic market watchers – and conclude the market is heading for a cyclical top, eying a 161.8% trading range move. This puts the S&P 500 at nearly 2146 over the short term. But that’s not the end of the technical bullishness.
Goldman’s S&P 500 technical forecast is interesting – eying 2394 and 2452, significantly higher than their fundamentally-based 2100 call of a few days ago.
While talk of the US stock market is interesting, perhaps more telling market gauge of global health at this moment in history is the British pound.
The British are in the middle of a Brexit scare the circumstances of which the world has never witnessed. A massive scare led to a market “V” shaped sell-off then recovery that benefited those who purchased assets after the crash. This is the center of market action, it can be argued, and the S&P 500 is removed to a degree from this performance driver. A much closer proxy is the British pound.
British pound and interest rates interesting to watch, begging the question: do interest rates have any bottom?
Going forward, the British pound is in the center of this economic battle and has potential as a benchmark to foretell of short-term trouble in the region. When the British pound drops in value it indicates potential economic weakness, but it also has a countervailing effect. The lower currency value has a history of attracting investment and economic activity. This concept has significantly benefited stocks on the FTSE 100. After dropping near 6,000 after the Brexit vote, it is now trading at 6670, its highest point since 2014. This in part explains the FTSE significant recovery after the Brexit and points to why the FTSE 100 is a most interesting benchmark, after the British pound.
In this regard Goldman notes a mean reversion point in the British currency relative to the US dollar.
“The decline since Jun. 29th seems impulsive,” Goldman’s technical analyst Sheba Jafari writes in a muted tone. A less polite method of communicating this is: “Enough is enough, intelligent people can see through the scare tactics.”
Jafari thinks a bottom might be put in near 1.2720 with potential to move down to 1.2518. Separate algorithmic structure analysis confirms the mean reversion appearance of the market and has 1.22 as a worst case downside.
Regardless of the exact mean reversion point, the material issue is a bottom is being put in. Goldman thinks if a recovery to 1.2518 is achieved, “watch for signs of a potential base developing.”
Jafari focuses on the technical aspects. But on a fundamental level, if the British pound stabilizes and moves higher it is a positive sign for the regional economy. The British are benefiting from the value of having their own currency inside the European region when that currency value goes lower. Many countries inside the EU, particularly those economically struggling, do not benefit from having their own currency under such circumstances.
Do German interest rates have a bottom?
The pound and the S&P 500 aren’t the only markets Jafari tracks, just perhaps the most interesting at this time. But in a close second place are some of the metals markets and to a lesser extent German interest rates and the Yen.
In terms of gold, Jafari sees a pivot point at 1366.80. The market needs to break above this level in order to achieve an “impulsive rally” to reach 1438 and 1457. In terms of the Dollar/Yen currency pair, support could emerge at 101.69-100.72 as the report noted weekly oscillators diverging.
Separately, both yen and gold trend extension are a few of several important components for managed futures CTA performance models going forward.
While the report did not cover the German bund, this was also an interesting market in the wake of Brexit, as interest rates continued to trend negative territory. For veteran market structure watchers such as CNBC’s Rick Santelli, these are market warning signs. “The market event we all know is coming around here” might be due to excessive market manipulation in interest rates.
Free market supply and demand principles are being dis-guarded like an old religion – and it’s all happening without much discussion. As they are discovering in Venezuela, supply and demand balance isn’t something that can be controlled forever.