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Short analysis of capital markets

Fiala Petr
Published: 21.9.2020 | Last modification: 21.9.2020 09:52  | Comments: none
ETF QQQ has fallen from maxims minus 12% in the last three weeks, SPY by -7.8%. Under normal circumstances, it would be a more significant correction; now, I feel that not much is talked about, probably because it's nothing compared to previous growth. Since March, QQQ is still + 61.8%. So what's next?

So what does speak in favor of stocks?

1. Weak US Dollar - A strengthening USD is seldom good for US stocks. Now the USD is relatively weak - a sign that investors are not afraid of risk.  They buy local currencies and assets at the expense of the dollar.

2. HYG - junk bonds - the price stays above the MA50 weekly. There is no panic here.

3. EEM ( emerging markets ETF) is much stronger (EEM -2.3% per week) than QQQ - speculators are not afraid to invest in emerging markets; sentiment is still risk-on.

I would now focus on the sentiment of individual market players - using COT reports and security lending by the FED.

Chart: Difference in net shorts for bonds and equities (US government 10y bonds minus NQ). Banks bet on stocks and against bonds. According to them, the bonds probably do not offer any significant growth potential, despite the hedging of the market by the FED. And this is the most significant signal for me that no significant decline can occur. Banks are still confident that the Fed must save the markets. If the market collapsed now, banks would go bankrupt - and that is not possible. Disruption of the financial system is unacceptable. So when this indicator falls back to negative levels (banks will be in LONG positions on bonds relative to the NQ contract), I would be afraid of a significant drop in stock prices.

Net SHORTs for the ES contract (SP500) - banks, speculators and retail. The chart shows one interesting thing - retail investors in the last two years were the smartest - they were the most "Net short" group at price peaks (marked in green). Banks were twice on the right side; In February 2020, then on the wrong side (that's why the Fed also had to intervene significantly). Speculators (funds) were in the NET LONG positions at price tops. The current chart shows how the funds were in massive short positions throughout this year's growth and how they now cover shorts and enter LONG positions. But I don't think it's time to short this market right now. At least one move up in stock prices is going to occur until the US elections, I suppose.

Security lending - suggests that the activity of investment banks in the markets is slowing down. This would indicate that the correction can continue. Banks do not take so much risk at current price levels.

Graph: QQQ price - I would expect at least one more QQQ growth to the second peak. The whole of this year testifies to the absolute dominance of the technology sector. The "new" stocks are winning, the stocks of the old economy are losing out. Also, thanks to coronavirus. If nothing is the same as before and we are approaching some new form of totalitarianism, where people will have to be locked up at home, then this is a situation from which the largest mega companies will benefit and small businesses will disappear. QQQ has a support at 265, then 252. There it could fall. I don't believe the decline could go lower.

Finally, I have a note on our automated trading systems. We currently operate two. We have an intraday model called Ultimate. It is running on the FIX protocol at Exante platform. We have also one LONG-SHORT model running at the Interactive Brokers platform. Since the beginning of the year, the first trades at Ultimate have only taken place in the last few weeks. The first tranche was also purchased at IB previous week. It's not that we're blocking it. Our models are based on "normal" volatility; they benefit from it. If the market behaves abnormally (which is valid for 2020) and is entirely one-way, our models cannot buy. So we hope that it has finally started and that the one-way market is a thing of the past.

Petr Fiala

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