Trader thoughts - The long and short of it

It’s a good time to hold equity and credit, and it seems a dark cloud in the form of the French elections has swiftly departed from the investment landscape, combining effectively with headlines on Trump tax reform and in turn providing fresh impetus to chase returns.

Market data
Source: Bloomberg

Implied volatility in so many markets has been absolutely crushed, and when combined with better earnings and positively trending markets we have traders, notably the systematic crowd, who have to be in the market. Throw in a fear of missing out (FOMO), as so many benchmarks by which money managers compare portfolio returns to move higher and you have a fairly bullish set-up. Shorts are closing and standing aside, as these are simply not the conditions to be expressing a bearish view – it feels unnatural to buy at these levels, but these markets are being driven (to a large extent) by systems, computers and algorithms. Furthermore, buying high and selling higher seems the right way to trade.

The MSCI world index has broken to new highs, where we can see the NASDAQ 100 and Composite moving up through blue sky territory. The S&P 500 closed above the 5 April high of 2378 and looks destined (in my opinion) to also break to new all-time highs in the short-term. Importantly, the market internals are not yet at levels one can consider to be euphoric, with 60% of S&P 500 companies above their 50-day moving average and 75% above the shorter 20-day moving average. 14% of companies have an RSI greater than 70 and 16% closed at a 52-week high. I will be watching these internals for signs that too much good-will is being baked into the cake, but for now, that time is not upon us.

The Dow has also closed 1.1% higher, curtsey of some big moves from Caterpillar and McDonalds, with Caterpillar coming out with some cracking numbers and this would be a conviction buy if adopting an analyst hat. Most importantly, the daily chart looks like a thing of pure beauty and pullbacks will be bought by money managers.

Perhaps one of the key issues which is getting much focus is the move in the USD index, which has broken the May 2016 uptrend and is trading at the lowest levels since November. A break of the 200-day moving average at 9,911 has also been noted as this could affect the systematic (algorithmic) fraction of the trading community. Interesting, this move lower in the USD has come at a time when the interest rate markets have increased their probability of a June hike (from the Federal Reserve) to 64%. It seems mostly EUR driven though, with EUR/USD also trading through its 200-day moving average and it almost seems a fate-au-complete that we see $1.1000 coming into play here.

Long EUR/AUD has been a great trade and I would be a willing buyer into a $1.4450 and see the December highs coming into play soon enough. That being said, tomorrow's European Central Bank (ECB) meeting does pose a real risk.

AUD/USD has struggled to find any traction of late and traded in a range of $0.7572 to $0.7521 overnight. Clearly, todays Aussie Q1 CPI print (at 11.30 AEST) poses a risk to any AUD exposures, but if we look at the options market (and the at-the-money daily ‘straddle’) we can see the market expects a modest 35 point move today. It hardly screams of a market that expects the Q1 CPI print to be a game changer for future RBA moves. However, with the quarterly trimmed mean inflation print expected to come in at 0.5%, any number at 0.2% (or below) or 0.8% (or above) could cause a strong reaction in AUD/USD and therefore buying the ‘straddle’ would be a good trade.

In terms of the Asian equity open and despite a rebound of sorts yesterday, one should keep an eye on Chinese markets given the pick-up in concerns around tighter liquidity and regulation. The CSI 300 is threatening key support at 3380, with a closing break here, and short positions on this index seem logical. Our call on the ASX 200 sits at 5920, with SPI futures up 0.8% from Mondays ASX cash market close and traders should keep an eye here on whether SPI futures can break the 13 April high of 5940. Naturally, if this development materialises in the near-term, it will push the ASX 200 cash market to new highs and once again we start talking about sexy 6000!

Drilling down, banks should be at the heart of the gains today, with energy and select materials doing well. I say ‘select’ as BHP was downgraded to ‘sell’ at Goldman Sachs, although BHP’s American Depository Receipt (ADR) has closed up 0.6% and doesn’t necessarily seem to be following its UK listing, which closed down 0.7%. A 1% gain in US crude should assist here, although we have seen selling coming into the barrel after the API survey saw a 900,000 and 4.4million build in oil and gasoline respectively as part of the weekly inventory report. On the bulks side, a 0.7% fall in spot iron ore shouldn’t derail too greatly from confidence when Dalian iron and rebar futures have gained 1.9% and 1.3% respectively.

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