S&P 500 | $ 4,793.53 | VIX | $ 17.09 |
DXY | $ 96.13 | S5FI | $ 77.62 |
The past few weeks have seen major US indices hit all-time highs and we believe that in the near term we could see a gradual retracement to stronger support levels while keeping primary trends unchanged.
For this analysis, we use three indicators: the US dollar index (DXY), the volatility index (VIX) and the "S & P500 stocks above 50-day average" (S5FI) indicator.
US Dollar Index (DXY)
Looking at the US Dollar Index (DXY) we can see the upward trend that began at the end of June 2021. The trend has been held by the 50MA allowing the DXY to respect an almost systematic fluctuation alternating phases of extension to phases of consolidation.
DXY is currently consolidating between $ 95.50 and 96.50 and we expect a push to at least $ 97.50 in the coming months.
Having a negative correlation, it is important to note how the DXY extension phases have had negative repercussions on the American indices.
Taking into consideration the S&P 500 (SPX), we note that:
DXY June 15 - July 15 2021: from $ 90 to 93.00 (+ 3.5 / + 4%)
SPX June 15 - July 21 2021: $ 4,257 to 4,168 (-2.5%)
DXY September 6 - September 30 2021: from $ 92 to 94.5 (+ 2.5 / + 3%)
SPX September 2 - October 4 2021: from $ 4,543 to 4,276 (-5.5 / -6%)
DXY from 29 October to 24 November 2021: from $ 93.50 to 96.5 (+ 3 / 3.5%)
SPY from November 5th to December 6th 2021: from $ 4,720 to 4,495 (-4.5 / -5%)
As anticipated at the beginning, we estimate a short-term extension of the US dollar index to $ 97.50: a target that corresponds to a + 2 / 2.5% from the support at $ 95.50
Extension that, if respected, would negatively affect the SPY for which we estimate an initial retracement of around 5% on the strong support area at $ 4,500 - $ 4,550.
Volatility index (VIX)
We believe the VIX index is an excellent indicator for estimating volatility in the short to medium term: negatively correlated with the S&P.
From the chart, we can see that since March 2021 it has regularly fluctuated between the support at $ 16-17 and the resistance at $ 23 - 24.
Over a longer period of time, it is possible to understand how the primary trend is still down, as a result, we will have long bearish phases interspersed with short upward periods.
At the moment, VIX is swinging at $ 17.15 and looking at previous moves we could expect an upside in the short term, setting the first target at $ 23.00 and the second at $ 28.00 - we exclude the possibility that VIX will break out of the current support and proceed to the downside.
Comparing it, even just graphically with the S & P 500, it is possible to understand that when VIX swings on the strong support at $ 16 - 17, we could expect bearish volatility on the SPX with an adequate level of conviction.
S&P 500 stocks above 50-day average (S5FI)
We believe that the indicator of S&P 500 stockcs above the 50-day average can help us better understand the cycles, even for short-term, within the market.
Looking at the last two years, we see that S5FI has fluctuated with a clear regularity between the support at 30-40 and the resistance at 80-90. The indicator reflects the uptrend of the S&P 500, oscillating more often closer to resistance rather than the support.
At the moment S5FI is at $ 77.62 and we believe that, given its regularity, it is approaching a point of reversal.
As can be seen from the graph, the S5FI does not help us understand the extent of a decline or an upside in the reference market. Rather, it helps us understand whether to go under or overweight certain positions, using a reversal approach: lighten when S5FI is in resistance and possibly increase exposure to the market in periods of decline of the indicator.
Conclusions
We believe that at the moment the SPX is at a level where the risk/return is more to the downside rather than to the upside.
To reach this conclusion, we used indicators that are directly linked to the performance of the S&P 500: individually DXY, VIX and S5FI may not say much, but it is from their union and combined analysis of past oscillations that we can prepare ourselves for possible market movements and decide when to increase/decrease exposure in portfolios.
The S&P 500 is in a well-defined uptrend and at the moment we do not see how this can change in the long term: from a technical point of view, the latter remains unchanged. However, we expect bearish pressure in the short to medium term that will lead the index to initially retrace to the strong support level at $ 4,500-4,550.
Graphs (update)
The graphs analyzed reach up to the day of January 4th included. The fluctuations of January 5th 2022 are, in our view, a further confirmation of bearish volatility that we expect during the month of January and February 2022.
OTB Global Investments
6 January 2022
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