/ April 30 - May 3 / Markets Review
A Struggle For Direction
Admin Note: today’s newsletter will cover a variety of topics and is meant to provide insights for the rest of the week as well. There will be no daily briefings on Thursday and Friday due to exchange closures and holidays in our region.
April was a tumultuous month for most major asset classes. “Liberation Day” sent shockwaves through the investing world and hit equities and commodities hardest. Treasuries also suffered, as the fear of inflation outweighed the fear of recession. Gold was the only winning bet, with the yellow metal surging on U.S. Dollar weakness and the prevailing “sell America” trade that became the knee-jerk reaction of investors.
The Euro was also perceived as a safe haven and performed in a similar way to Gold for the last month. What we are really seeing in the chart below is a 3 part reaction to the tariff saga:
The Safe Haven Play (Gold & Non-US Assets)
US Markets (Equities and Treasuries)
Recession worries (Commodities)
We will explore each theme in today’s missive.
On the safe haven side, Gold has become massively overbought, at least for the medium term. We’re looking at a 28% CAGR if the current trend persists, which is impossible in our view. Impossible not because gold bugs wouldn’t push prices to $4.200 per ounce, but it’s hard to imagine other assets depreciating to that extent (especially the U.S. Dollar).
Gold is a temporary haven for ultimate safety. It does not offer any yield. It is an asset class of last resort for investors who would like to avoid cash, as well as exposure to treasuries and equities.
With the price move now pushing 2 standard deviation extremes, and a huge (-17.5%) gap to the 200-DMA, it’s reasonable to expect a cool-off in bullion. This would occur on a medium timeframe, as longer term fundamentals for gold remain solid. The options market seems to agree, with GEX positive for GLD, but Dark Pool flows are deteriorating across all aggregation windows (56% 3M -> 54% 1M -> 43% 1W -> 40% yesterday).
With such bearish Dark Pool trends for the premiere safe haven asset class (gold), it’s only normal to assume that all of the risk-on assets are commensurately getting bids. And it looks like they are.
In the chart below, we’ve sorted the top S&P 500 stocks by Beta to SPY and plotted their Dark Pools buying index over a 1 day to 1 month aggregation window. For most of these issues, which include the magnificent 7 stocks, trends are clearly improving.
A bullish reading occurs at 55%+, so none of these stocks are there yet, on any interval. But the trend is unmistakable.
Furthermore, on Friday, the Zweig Breadth Thrust, a rare technical indicator, triggered a bullish signal. The signal indicates rapid and significant changes in momentum. The calculation is based on the 10-day moving average of the percentage of stocks that were positive on a daily basis. The Zweig Breadth Thrust signal occurs when the moving average rises from below 40% to above 61.5% within 10 days. It is trying to capture the final capitulation in a downward trend.
A Zweig bullish thrust signal is rare. But it’s been a great predictor of positive forward returns when triggered, as shown below. Since 1950, the bullish indicator has only triggered 16 times, not including last Friday. The graph and table below show that in every instance the rare Zweig bullish thrust signal has occurred, it has consistently produced positive returns in the six-month and one-year periods. The shorter-term returns are positive in almost all cases.
While this doesn’t guarantee the downward trend is over, it does provide optimism that those willing to hold through more volatility and potentially lower lows will ultimately be rewarded.
To a certain extent, this is what our own Enterprise strategy has also detected (though based on completely different triggers). Enterprise has re-added stocks to its portfolio to the tune of 47.5% exposure. While this is still a “defensive” allocation, it is higher than the 0% it was exhibiting before this week’s rebalancing.
Technically, it was SPY’s re-entry into its unadjusted trading channel which served as the basis for the buy order in Enterprise. With so much uncertainty in the world at the moment, technicals are just about the only meaningful allocation tool, so we are much more inclined to follow this doctrine for the moment.
In the short term, the options market is seeing significantly more potential downside than upside at the moment, for SPY and QQQ in particular, but also for sectors like Industrials (XLI) and Financials (XLF).
We would definitely agree with this assessment, as the market is close to becoming overbought in the short term. With heavy resistance forming at the 50-DMA, SPY’s next move is more likely to be lower and we may as well see a retest of recent lows before a resolution in either direction.
Just to illustrate a point, JP Morgan has just recently turned bullish on US stocks (from previously mildly bearish), and dropped a truth bomb on us. “Stocks have the potential to go up, but also come down.” — Thanks a lot, JPM!
Our Trading Strategy
We are trading and investing in truly unique times (by modern standards).
Throughout humanity’s history, however, there’s nothing new under the sun. We believe the world is fundamentally changing, going from a previous unipolar and US-dominated order to a multi-polar order that’s riddled with conflict.
The forces that drove a decade of low inflation and allowed for repeated central bank interventions and money printing are coming to an end. The Fed can no longer stave off a recession and get low inflation simultaneously. Even if the Trump administration and China negotiate lower tariffs, trade relations can never go back to the way they were, in the same way as the conflict in Ukraine can not be reset to the original borders.
The West is coming to a historical reckoning. It simply has to produce more and issue less debt, if it wants to stay afloat. Otherwise, the whole system crumbles (and with it both stocks and bonds).
It’s easy to sound very bearish here, filled with doom and gloom. But the future is yet to be written, and, as JPM’s analysts correctly point out… asset markets can go up, as well as come down. That is why our investing at this stage is based completely on technicals, strategy model allocations and Dark Pools / GEX flows.
As our PRO readers know, we have increased exposure a bit on Friday, rebalanced holdings to reflect a more risk-taking approach and kept enough dry powder to remain flexible. We’ll see and adapt to what the future brings, but our strong research framework can surely handle what each trading day throws at us.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!