Global equities’ upward trend masks critical vulnerabilities
MSCI poised to add 5-6 pct in the third quarter
Report prepared by Ahmed Shibley
Swiss International Financial
Brokerage Co
Global share prices accelerated upward in the third quarter, building on the rebound started in the preceding three months. The benchmark MSCI World stock index is on pace to add 5-6 percent for the period. That such performance can be had against a backdrop of a deepening trade war between the US and China as well as increasing emerging market instability is almost improbably impressive. One might conclude perseverance against such odds speaks to hearty underlying strength, making continuation likely. Still, critical vulnerabilities are much too glaring to ignore; the global economy has decelerated in 2018.
Heading into the end of the year, upside resolve may be put to the test for the US S&P 500; but until we see big levels break on the downside, the trend for US stocks will remain pointed higher. In terms of the German DAX 30, heading into the previous quarter, we said that a broad head-andshoulders pattern, with its beginnings dating back over a year, could come into play. Another three months later and the index is flirting with this scenario becoming a reality. The UK FTSE 100 is on similar footing as its German counterpart. After several months of sideways trading the Japanese Nikkei 225 is sitting with better posturing than both the DAX and FTSE, but is still lagging behind the S&P 500.
EUR/USD has been chopping around in recent months, but that may soon end as we head towards the end of the year. One potential scenario on the radar right now is a head-and-shoulders, with the right shoulder nearing completion if it is to come to fruition. Support levels below need to break (August low/neckline), though, before validation and momentum starts to really pick up. But if a breakdown occurs we could be looking at lows carved out from 2015-2017.
The range during September ranks as one of the smallest in a long time, setting gold up for a more volatile month in October. The trend is down and with the US dollar looking to go back on the offensive that means another swoon may soon be in store.
The August spike-low at 1,160 is first up as support, and after that there isn’t any highly visible support the December 2016 low near 1,120. If things really start rolling downhill we may be looking at the 1,046 low from December 2015.
Crude oil may be posting a headand-shoulders top; however, the right shoulder needs to identify itself soon or else this scenario is off the table. Without a turn lower, focus will move towards a breakout above the July high and the trend-line extending lower from the 2008 spike-high. A test of the trend-line would almost certainly raise volatility and in all likelihood send oil in reverse on a first attempt to break, if not cap the cycle off the 2015 low altogether. Calls for $100 Brent oil echo an overly bullish market.
After the downdraft to start the year the market looked headed for trouble, but has since put itself back together for yet another record run. The new high may indeed turn out to be a head fake and the sell-off to start the year a shot across the bow, but until the powerful combination of the Feb 2016 trend-line (end of prior bull market correction) and 200-day are broken, the market will remain pointed upward.
Keep an eye on the Nasdaq 100 and the bull-market darling group of stocks – FAANG (Facebook, Apple, Amazon, Netflix, and Google). This small group coupled with Microsoft account for about half of the weighting in the NDX. So goes the market leaders goes the market.
There is a still topping potential for the Nasdaq 100 with the continued development of a rising wedge on the weekly chart. A clear break of the lower trend-line is needed to validate the pattern. The market could shoot on higher and rally into year-end, so the bottom line is (as the case is with any price pattern) it won’t matter until it does, if it does. That is why waiting for validation on chart formations is so crucial.
As the week draws to a close, so too does the third quarter. Marked by robust strength in US equities and the 10th anniversary of Lehman Brothers’ collapse, the third quarter saw the most growth in the S&P 500 since the fourth quarter of 2013.
Despite the strong performance of US equities and general risk-on mood this week, investors moved funds from exchange traded funds with US exposure. As we have covered previously, SPY, VOO, and IVV track the performance of US large-cap corporations.
At the quarterly level, the three funds saw $157 billion in inflows. Compared to their cumulative market capitalizations (roughly $1 trillion) and the week-to-week changes, the change in exposure quite large. The second quarter saw a net inflow of $34 billion, a figure significantly dwarfed by the third quarters. The willingness to have US exposure suggests investors are still confident in the bullmarket heading to the year’s end.
On a smaller scale, the three ETFs saw an aggregated $16.13 billion flow elsewhere for the week. After last week’s robust inflows it is not entirely surprising to see moderate outflows this week. Profit-taking could be a possible reason for the change, along with more attractive opportunities elsewhere.