S&P 500 Update: Reasons to sell and levels to add short

S&P 500 Update: Reasons to sell and levels to add short

We have achieved our first target at 2865 of our short trade which we have entered in 2960.

Technically our trade was based on Bearish Black Swan Harmonic pattern. But our trade was supported by the fundamentals. What are the reasons to sell the indices?

1. FED clearly won in stopping the panic, restoring calm & order in the credit markets, and managed to create a new bull market in the equities. However, the new bullish wave in SPX was driven by a few companies’ stocks. The money pumped by FED is not going into real sector. This is not a sustainable financial operation to support the indices.
2. Powell put it clear. We have not seen the worst.
3. Risk indicators not aligned with the recession. Every volatility index (except oil volatility) has come down sharply from panic highs. VIX was at 84 now 30 (this is not cheap itself but shows the magnitude of the move lower), VXEEM was at +90 now 32, TYVIX was at 16 now at 5.2, MOVE was at +160 now at 57, Credit protection has come in big, CDX IG from 150 to 86, iTraxx main from +130 to below 80, FRA-OIS spreads have come down big time from panic highs. This feels like an overshoot vs where it should trade in a recession.
4. Volumes were not supporting the latest bullish move.
5. Sell in May and go away.3 of the 4 coming months historically have a negative return.
6. Key technical resistance levels: SMA 200 and Fibonacci 61.8.
7. As well explained on Financial Times: US stock market rally confuses liquidity with solvency
   Many zombie companies will fail, no matter how much is sprayed around by the Fed

” Two contradictory signals have emanated from the US this week. On the one hand, economic news has been dire: gross domestic product shrank by 4.8 per cent in the first quarter and Jay Powell, Federal Reserve chair, warned of “considerable risks to the economic outlook over the medium term”. Oxford Economics now projects a peak-to-trough decline in GDP of 12 per cent in the first half of this year. That is three times worse than during the 2008 financial crisis. Ouch.

Yet at the same time, US stocks have rallied. The S&P 500 is 31 per cent above its March low and only a whisker down on the year. “The gap between markets and economic data has never been larger,” notes Matt King, analyst at Citi.

Does this make sense? The answer depends on whether the lockdown has created a liquidity or solvency problem.

If the former, it seems reasonable to think that the US Federal Reserve and Treasury can produce a fix for corporate America. Citi estimates that global central banks have unleashed $5tn worth of asset purchases in recent weeks, with the Fed accounting for half. This has prevented a freeze in markets such as treasuries and municipal bonds. It has also boosted corporate bond prices, enabling many investment-grade companies to raise funds. This week a riskier credit, Delta Air Lines, sold bonds too.

Meanwhile, the US Treasury is pumping out more than $650bn of loans to small businesses and starting a $500bn program to help medium-sized entities. These initiatives do not always hit their intended mark. But the key point is that liquidity issues are being addressed.

If Steven Mnuchin, Treasury secretary, is correct, this liquidity fix will see companies roar back when the lockdown ends. Some financiers agree. “We’re witnessing what is likely to become a powerful recovery in global stock markets as investors look ahead to the latter half of 2020 and into 2021,” says Nigel Green, founder of deVere Group, the financial adviser.

However, such optimism looks misplaced if you think the crisis has also created serious solvency problems. A $5tn central bank prop can keep credit flowing. But it cannot conjure up economic demand or turn bad loans into good credits. The risk stalking both markets and the Fed is that many companies are quietly becoming insolvent, as their debts overwhelm their collapsing revenues.

Technically:

Shorter Term: We focus on the following levels. 2812 2765 2730

Medium Term: After closing below 2700, we predict the index to test 2650 and 2580.

Longer Term: 2200 and 200 will be our target levels.

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