U.S. Dollar Index is breaking, higher suggesting further USD strength lies ahead

  • The U.S. Dollar Index broke through its trend resistance from 2016 and starts to gain momentum amid the global risk-off sentiment
  • A weekly close above 96 would suggest further USD strength for the coming days and weeks, primarily due to its safe haven character
  • Trade idea: overweight USD, primarily against EUR and KRW

Nikkei just broke its 2-year uptrend – further equity weakness ahead

  • After breaking its uptrend from 2016, Nikkei is facing further downside risks and follows the global equity weakness
  • This negative trend could gain momentum in a risk-off environment as JPY should strengthen as well which would add further downside pressure

Are U.S. Financials a further sign of a market top?

  • Many argue that the global economy is in a period of synchronized growth and that higher rates will positively impact financials (overweight cyclicals vs defensives)
  • However, the market is showing a different picture, in particular the FINANCIAL SELECT SECTOR SPDR ETF (XLF US Equity – see above) which broke major support levels and reached YTD lows
  • The price discovery process is always leading any economic changes, and thus, this development does not fit the global growth narrative and is a sign of further market weakness
  • This development is especially threatening for European banks (EURO STOXX Banks Price EUR – see below) as they are still hovering around alltime lows and do not have a cushion for weathering a crisis
  • Trade idea: Reduce global exposure to banking stocks and in case of a more risk-seeking approach, build small short position

NOKCHF technical setup looks increasingly bearish

  • The global risk-off sentiment should lead to further CHF strength
  • The probability of higher oil prices seems also limited amid global growth concerns and in light of increased daily output. Thus, as high beta currency, NOK should subsequently weaken over the coming days
  • Trade idea: The technical setup with a strong resistance at 12.11 and the overall macro outlook point to an attractive risk/reward for shorting NOKCHF at current levels (SL above 12.20)

S&P500 Equal Weighted ETF shows signs of broad equity weakness

  • The equally weighted S&P500 ETF (RSP US Equity) has broken its 2-year trendline which suggests that the broad market has started to feel some pain
  • Trade idea: It’s time to buy downside protection, liquidate the longs or even start increasing short exposure in US equities

Semiconductor Index is adding further pressure to the overall market sentiment

  • The Philadelphia Stock Exchange Semiconductor Index (see above) broke out of its 2018 wedge and is at risk of moving lower
  • This bearish technical view is further supported by the growing US-China trade tensions with an ever stronger focus on tech
  • Trade idea: Short ISHARES PHLX SEMICONDUCTOR ETF (SOXX US Equity) with a stop above USD 180

Are US Homebuilders pointing to further downside risks?

  • The US Homebuilders ETF (XHB US Equity) has broken a major trendline from 2016 lows
  • In light of rising US rates, a weaker housing market and overall US equity weakness, the US Homebuilders ETF seems ripe for lower levels
  • Trade idea: Short XHB US Equity with a target range between 35 – 36 USD

Is it time for defensive stocks?

  • The recent economic strength in the U.S., particularly after the elections and driven by tax cuts and fiscal stimulus, has led to a strong out-performance of cyclical stocks versus defensive stocks (the above charts shows the relative performance of cyclicals vs defensives)
  • However, it has to be assumed that these economic measures will only provide a short-term boost to the U.S. economy and therefore the optimism about the growth outlook has to be evaluated critically
  • In this regard, an ongoing out-performance of the U.S. cyclical vs defensive sector seems fragile, especially compared to its historical level
  • Strategy: Based on this view it seems reasonable to start over-weighting defensive stocks versus cyclicals, and thus, to take profit on this relative out-performance of more than 20%
  • Nevertheless, a significant break and stabilization of the U.S. 10y yield above 3% could be a risk for this strategy