Weekly Preview / May 2
Notable Events on our Weekly Watchlist:
Monday: GAIA , ISM Manufacturing
Tuesday: EU Unemployment, JOLTs Job openings
Wednesday: ADP Employment Change, ISM Non Manufacturing PMI, FED FOMC
Thursday: AOSL
Friday: Nonfarm Payrolls, Unemployment rate
In our last weekly preview, we asked two important questions given the heavy earnings calendar: will SPY be able to recapture a key technical support level, and what would be the dollar transaction volume that goes with this move. We now have our answers. Next week will feature important economic releases and volatility will culminate after the FOMC meeting on Wednsday. Let’s dive in…
SPY Analysis
In the Signal Sigma framework, SPY is the instrument we monitor for general asset class allocation to equities. If SPY closes below its technical channel (Z-Score -1 or lower) after a prior uptrend, our system closes out equity exposure in all portfolios.
SPY did not manage to recapture the key technical level needed to maintain long equity exposure positions. Therefore, all strategies have removed “Stocks” as an asset class from target portfolios on our weekly rebalance, Tueseday. Preffered asset classes are now Gold, Commodities and Cash, the only major investible themes.
Next week will feature an important economic calendar, with key developments on Wednsday and Friday. Given the dismal performance of risk assets recently, it’s very much possible to get some dovish comments out of the FOMC meeting on Wednsday, and see a short covering rally into Thursday. I expect the most beaten down high-beta, high-risk stocks to perform well in this scenario. That’s the play if you feel lucky.
Volume Analysis
Volumes have gone up on the recent downturn. A spike in volume is usually interpreted as confirmation of the underlying move.
In this case, however, we don’t see the typical volume pickup, or even anything abnormal. Just by looking at the volume chart, we couldn’t even tell there were some massive moves going on in the main index. If anything, this analysis tells us the move is not over. We would like to see low volumes for that to happen.
Takeaway:
The Signal Sigma process teaches us a simple lesson. Don’t buy into an asset class if its representative index (S&P500 in this case) is trading below its technical channel, after a prior uptrend. On an intermediate to long term horizon, the risk is high that we will see further declines. Short term, anything can happen, including spectacular rallies (we expect one after the FOMC meeting on Wednesday for example). But for the moment, patience will pay the best dividends.
Andrei Sota