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Daily RAG Recommendation
Daily RAG Recommendation
5th October 2015
1 – 2 Week View on Risk
Longview Economics
Direct Line: +44 (0) 870 225 1388
Email: [email protected]
'Start BUILDing SHORT positions'
Daily RAG* (Equity trading recommendation) – 5th October 2015
The Daily RAG publication is designed to generate 1 to 2 week trading recommendations on equity
indices. For trading recommendations on currencies, rates, bonds and other assets, pls see MacroTAA trade publications
*RAG = Risk Appetite Gauge
1.
Current Recommendation on Equity Index Futures
Short term ‘Daily RAG’ recommendation (i.e. 1 – 2 week view): Start BUILDing
SHORT positions on strength if forthcoming – i.e. ¼ SHORT @ 1,964 (with 3% stop
loss)
Medium term ‘Tactical Equity Asset Allocation’ recommendation (i.e. 1 – 4 month
view): NEUTRAL/FLAT Equities - latest update published Monday 14th Sept – see
Longview Alert No.34: “Relief Rally – Largely Played Out (remove OW)” – NB Update
out later today
2.
Update on trading recommendation
Asian and European equity markets are strong following the sharp reversal in US
equities in Friday’s trading session. Having opened lower on the back of poor nonfarm payrolls data, US equities reached their low point at around 3pm London time (&
@ 1,883 on Dec futures). The index then closed 60 points higher at its highs for the
day (i.e. @ 1,943). Intraday swings, whilst wide, were equivalent to last Monday’s
session (i.e. both 60 – 61 points intraday trading range). Reflecting the market’s
interpretation of the weak payrolls data, the fed funds futures all moved lower (i.e. to
price in reduced rate hike probabilities – FIG 3) along with the rest of the US yield
curve (e.g. US 10 year yields closed, for example, below 2%).
With that strength in risk appetite on Friday the case for moving opportunistically
SHORT continues to BUILD for 3 key reasons:
1. Many of our short term models are now on or close to SELL: The combined RAG1
+ RAG2 model is now close to SELL (FIG 2) – and typically generates efficacious
SELL signals (especially at +1 std deviation); the ‘US stocks above their 10 day
moving average’ model (FIG 2c) is back on SELL; The short term put to call ratio
is at a level consistent with a near term pullback in equity markets (given current
elevated volatility levels – FIG 2b), while the aggregated short term scoring system
is NEUTRAL (see section 3 below).
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Daily RAG Recommendation
2. Certain, although not all, measures of
signalling a high level of complacency.
particular, is back at a level consistent
volatility environment (FIG 4a). Against
(FIG 4).
market fear and greed are once again
The steepness of the volatility curve, in
with a pullback given the current higher
that, the SKEW index remains subdued
3. Other asset markets continue to exhibit signs of stress. In particular US high yield
corporate bond spreads widened again on Friday (both incl and excl energy – see
FIGs 1 and 5a). As FIG 1 shows, these spreads correlate with and often lead the
S&P500.
Additionally the DAX is back at key near term resistance levels (i.e. 9,787 on Dec
futures which is intraday high from 1st Oct); Next level above that is then 10,019 (i.e.
intra-day highs from 22nd Sept). S&P Dec futures are currently at their intra-day highs
from 25th Sept (i.e. 1,951). Key levels above that include the 50 day moving average
at 1,997.
As such we recommend starting to cautiously BUILD SHORT positions on strength (if
forthcoming) with an initial ¼ SHORT at 1,964.0 on S&P Dec futures (with a
recommended 3% stop loss). Key risks are multiple – not least a continuation of this
near term risk rally back towards the 50 day moving average on the S&P Dec futures.
Added to that, possible signals from the Fed starting to reverse its tightening stance
may also reassure the market (Fed Governors speaking this week includes: Williams
on Tues; Kocherlakota & Williams on Thurs; Lockhart & Evans on Friday as well as
Fed minutes on Thursday).
Knd rgds
Chris
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Daily RAG Recommendation
FIG 1: US high yield bond spread over US 10 year Treasuries (inverted) vs. S&P500
FIG 2: Combined RAG1 + RAG2 vs S&P500
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Daily RAG Recommendation
FIG 2a: Longview SHORT + MEDIUM term scoring system vs S&P500
FIG 2b: CBOE put/call ratio (1 & 3 day smoothed) vs. S&P500
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Daily RAG Recommendation
FIG 2c: US Stocks above 10 day moving average vs. S&P 500
FIG 3: US Fed funds futures – various contracts
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Daily RAG Recommendation
FIG 4: SKEW* index vs. S&P500
FIG 4a: Steepness of VIX curve vs S&P500
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Daily RAG Recommendation
FIG 5: Various EM CDS prices (5 year, bps)
FIG 5a: US high yield (ex utilities & energy) bond spreads over US 10 year Treasuries
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Daily RAG Recommendation
FIG 4: S&P500 futures candlestick chart – shown with key moving averages
FIG 4a: DAX30 TR index futures candlestick chart – shown with key moving averages
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Daily RAG Recommendation
3.
Overview of models:
Short term (1 – 2 week) scoring system (fig 1b): Neutral
Medium term (1 – 3 month) scoring system (fig 1c): Neutral
With strength in equities on Friday, scored short term models have closed out their
collective BUY signals. Both RAG2 and shortest term RAG turned SELL overnight
while RAG1 is close to SELL. The calls less puts model remains on BUY and breadth
is neutral. Reflecting that, the short term scoring system is currently neutral (but
moving towards SELL). Medium term models continue to lean towards BUY (albeit
modestly), with two models on BUY and six neutral.
Other models support the case for starting to build SHORT positions. Technical
models are moving rapidly towards SELL (e.g. US 14-day RSIs – FIG B). Short term
breadth models, both in Europe and the US, are close to SELL (see FIG C & FIG 2c
above). US implied equity volatility made a new 9-day closing low, with the VIX closing
at 20.9% (i.e. at its 50-day moving average – FIG D). With that, the VIX is now close
to oversold levels (i.e. an equity SELL signal – FIG E).
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Daily RAG Recommendation
FIG A: Longview Short Term Scoring System vs. S&P500
FIG Ai: Longview Short Term Scoring System vs. DAX 30 TR index
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Daily RAG Recommendation
FIG B: US short term volatility adjusted MACD model vs. S&P 500
FIG C: Proportion of STOXX 600 stocks above their 10-day moving average vs.
STOXX 600
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Daily RAG Recommendation
FIG D: VIX candlestick (%) – shown with key moving averages
FIG E: VIX short term (14-day) RSI vs. S&P 500
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Daily RAG Recommendation
4.
Key macro data/events
Macro data due to be released later today includes UK services PMI (9:30pm), EZ
retail sales (10am), US services PMI (2:45pm), ISM non-manufacturing and the Fed’s
labour market conditions index (3pm). Events include an EZ Finance Ministers
meeting in Luxembourg (2pm).
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