Equity markets lost significant ground yesterday with the Dow and S&P closing down 1.9% and 2.0%, respectively, to post their biggest losses since April. European markets averaged a 1.3% decline with the Dax losing nearly 2.0%. A run of poor corporate earnings in Europe and the US combined with concerns about the Russia/Ukraine crisis, the Argentine default and another plunge in Portuguese stocks all contributed to poor market sentiment. As problems mount for Portugal’s Banco Espirito Santo (its share price sank 42% after it reported a €3.6 billion loss for the first 6 months), Portugal’s PSI Index fell 3.1% following on from a 3.3% loss on Wednesday.
There was also poor news from large corporates in all key markets. In the US it was Exxon Mobil and Whole Foods, in the UK it was LLoyds and Weir Group whilst in Germany it was Adidas and Lufthansa. Meanwhile Argentina’s equity index was down 8.4% after the Country’s second default in 13 years.
The VIX Volatility Index rose over 20% from 13.5 to close at 16.95 which is the highest level since April 11. The economic data did little to inspire any improvement in sentiment. US Jobless Claims rose back to 302k from a downwardly revised 279k last week whilst the Chicago PMI sank to 52.6 in July from 62.6 when markets were looking for a rise to 63.0. The Employment Cost Index rose 0.7% in Q2 versus 0.5% expected. In Europe the CPI for July was just 0.4% year on year – a 5 year low.
This morning on the economic front we have German and Euro-Zone Manufacturing PMI at 9.00 am. This is followed at 9.30 am by UK Manufacturing PMI. At 1.30 pm we have US Non Farm Payrolls which are expected to rise 230k together with the Unemployment Rate and PCE Core. At 2.45 pm we have US Manufacturing PMI whilst at 2.55 pm we have the latest University of Michigan Consumer Confidence. Finally at 3 pm we have the US ISM Manufacturing Index.
September S&P 500
Yesterday the S&P had its worst day in over 3 months with the market closing down 2.0%. The key support for the S&P came in at 1945/1950 and once this level was broken the market just accelerated lower again. The big question from here is ‘have we seen the top for the year or will the S&P again be able to re-group and and again be able to challenge the highs which has been the theme of the last 18 months?’. It is over 3 years since we have had a 10% correction.
Today the S&P is severely oversold and is trading at the bottom of its Bollinger Band and Williams Index. At 1.30 pm we will get the latest Non Farm Payrolls. I am going to stay flat until these numbers are released as no matter what the number is I still expect at least a continuation of yesterday’s sell-off. In addition, I expect there will be huge ‘margin calls’ after yesterday and these calls generally go out in the US between 1 pm and 3p m our time. After the numbers are released I will be a seller on any rally back to 1938/1943 with a 1951 stop. I will also look to buy the market on any dip to 1917/1922 with a 1912 stop. If I am taken long and subsequently stopped out I will be a more aggressive buyer in front of 1907 with a 1899 stop.
Euro/USD
After I posted yesterday the Euro finally traded down to my 1.3375 buy level. Despite the severity of yesterday’s stock market correction the Euro has held in very well and with it trading at the bottom of its Bollinger Band and Williams Index it makes it very difficult to go short. I am going to stay long and I will leave my stop the same at 1.3345 which is just below key support at 1.3360.
US Dollar Index
No change as I still do not want to chase this market higher given how overbought the Dollar is currently trading. Therefore I will leave my buy level the same at 80.00/80.20 with a 79.75 stop.
September DAX
Yesterday was another great example of how important it is to trade with stops as shortly after I posted the Dax was trading at my 9485 buy level. Thankfully I only had a small position and eventually very late in the trading session I was stopped out of this position at 9445 before the market proceeded to accelerate lower. The Dax is down over 350 points since lunch time Wednesday after the US announced its 2nd Quarter GDP at 4.0%.
Today the market is very oversold and is currently trading at the bottom of its Bollinger Band and Williams Index. It has very good support between 9320/9380 form where I would expect a decent rally to come from in the short term. Today I will again be a buyer from 9320/9360 with a wider 9290 stop. I have to use a wider stop given the volatility. Given how oversold the Dax is currently trading I do not want to be short the market at this time.
September FTSE
Shortly after I posted yesterday the FTSE was trading down at my 6715 buy level and after a brief sell-off I was stopped out of this position at 6695 for a small loss and I am now flat. It continues to hold in better than the other major Indices but as I mentioned yesterday a break and close below 6710 is bearish and for this reason I will be looking to sell any rallies. Today I will be a small seller from 6695/6715 with a 6735 stop.My only interest in buying the FTSE today is on a dip to 6630/6645 with a 6615 stop.
Dow Rolling Contract
Thankfully I had a very tight stop on my Dow long position yesterday as shortly after I posted it was trading at my 16780 buy level before very quickly stopping out of this trade at 16740. Incredibly it fell another 170 points from this level and crucially closed below its 31 Dec 2013 high at 16589. The Dow is now down slightly for the year and just like the S&P is very oversold here and today I will be a small buyer on any further drop to 16495/16540 with a 16450 stop. Given how oversold the Dow is currently trading I do not want to be short the market at this time.
September BUND
The Bund plan worked well yesterday as shortly after I posted it was trading at my 148.25 sell level and after a nice sell-off I was able to cover this position at 147.85. It continued to sell-off and traded down to my 147.70 buy level. After a nice rally in the Bund this morning I have covered this long position at 148.05 and I am now flat. Today I will again be a small seller on any rally to 148.30/148.55 with a 148.80 stop. I will still be a small buyer on any dip back to 147.30/147.60 with a 147.15 stop.
Gold Rolling Contract
I was very surprised that Gold did not rally when the equity markets started to sell-off and illustrates how weak the market is trading at this time. I was stopped out of my long 1295 position from earlier in the week for a small loss at 1283 and I am now flat. I am going to stand aside in the Gold market today as I prefer to be long Silver at this time. The next major support for Gold comes in at 1245/1255.
Silver Rolling Contract
Finally after I posted yesterday Silver traded down to my 20.35 buy level. I am still long and I will leave my stop the same at 19.85.
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