Technical Analysis: S&P 500 Monthly recession tracker – July update (risk-on) August 13, 2018

Our Phillip recession tracker is based on 17 market-based and economic-based indicators. The threshold represents the levels where bearish signal arises.
Red/Green represents deterioration/improvement from the prior month. Otherwise, it is unchanged.

For more information on how we decipher the recession tracker indicators, refer to the report
All clear for now
All clear for now part 2

  • All the indicators in the Recession Tracker remain well within their thresholds signalling for further upside in the general equity market (positive)
  • Extreme short positions are building up again in VIX Futures warning for an impending spike higher in the VIX index (negative)
  • Consumer sentiment remained at their multi-decade high signals further optimism (positive)
  • Expect the DJIA, S&P 500 and Nasdaq 100 index to stay within their uptrend and to retest their respective record highs

Overall, the performance of the US equity market was rather strong in July despite the ongoing trade tension.

July performance:

DJIA: +4.7%     S&P 500: +3.5%    Nasdaq 100: +2.5%

Some of the key highlights in July that surrounded the markets are the Chinese Yuan devaluation and Trade War escalation. Nonetheless, these negative newsflow only affected the market minimally, and the strong economic data and the general beat in Q2 earnings ushered in the risk-on behaviour.

Chinese Yuan (USDCNH) devaluation likely to reverse near the 7.0000 psychological barrier

The Chinese equity market felt the brunt of the weakening Yuan as the USDCNH (offshore Yuan) continued to depreciate to a new 10-month high of 6.905. From the yearly low of 6.2357 in April, the offshore Yuan has devalued 9.6% against the USD translating to a -14% loss in the Shanghai Composite Index in the same period. Looking at the historical chart, it seems like the red line for the USDCNH is around the all-time high of 6.9863, formed back in December 2016.

The psychological big round number of 7.000 should be a major barrier if the offshore Yuan continues to devalue. Drawing some correlation shows that the PBOC is deliberately devaluing the Chinese Yuan to combat the tariffs on Chinese goods since April.

In other words, the trade war rhetoric should fade away once the PBOC halts the Yuan devaluation near the 7.0000 psychological round number. All in, that should first bode well with the Chinese equity market where we expect a strong reversal higher in the Shanghai Composite Index. On the flipside, the de-escalation of the trade tensions between the US and China should also bring back further risk-on appetite into the US equity market as the uncertainty from the trade war aspect eases away.

Figure 1: USDCNH likely to remain capped at 6.9863 – 7.0000 psychological area

Shanghai Composite vs USDCNH Monthly chart

Trade escalation having less impact on the market

Trade conflict remains the main highlight in July as the US further threatened to increase the size of the tariff from 10% to 25% on $200 billion worth of Chinese goods. This is after the US imposed 25% tariffs on $34 billion of Chinese products in early July. The news of this escalation came on 1 August, but it appears the market is getting used to the trade war scare as the negative impact on the US equity market was short-lived. For example, the S&P 500 index only fell –1.2% over the following two days before buyers reappeared to turn things around. We have mentioned in the June review that the trade tension inspired selloffs are getting a smaller negative impact on the equity market each time and the recent escalation on 1 August further confirms the idea.

Figure 2: Market shrugging off the trade tension news

Hence, moving forward, expect the market to be less affected by the trade war tensions and any selloff caused by the trade scare should be used to reposition back into the equity market to ride out further upside. Despite China retaliating with announcing tariffs on $60bn of US imports on 3 August, the equity market remains unfazed.

Market participants are paying more attention to the overall earnings this time around. Apple showed some stellar performance. With the positive results, Apple became the first company in the US to achieve a market capitalisation of $1 trillion, surpassing $203.50 per share. In summary, the market cheered on a better than expected top and bottom line. Apple reported Q3 earnings per share (EPS) of $2.34 as compared to the expectation of $2.18. Revenue for Q3 was up 17% YoY to $53.3 billion, beating expectations of $52.4 billion. The Q4 revenue guidance was another major catalyst for the rally in Apple’s share price. Apple’s Q4 revenue forecast expects revenue to range between $60 billion and $62 billion, way above analyst estimates of $59.4 billion

This positive results also ushered in a feel-good effect to the rest of the equity market lifting the DJIA, S&P 500 index and more so the Nasdaq 100 index back into the uptrend.

Overall, the company earnings for Q2 2018 are beating the market’s expectations to the upside and hence, we should continue to see further risk-on appetite flowing back into the market. To date, more than three-quarters of the companies in the S&P 500 index have reported their results for Q2 2018. Of which, 80% have reported a positive EPS surprise while 74% have reported a positive sales surprise.

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About the author

Profile photo of Jeremy Ng

Jeremy Ng
Research Analyst
Phillip Securities Research Pte Ltd

Jeremy specialises in Technical Analysis and has 10 years of experience in studying price action. His areas of expertise include intermarket analysis on the equities, currencies, commodities and bonds market.

He is also a regular columnist on The Business Times - every Monday ChartPoint column.

He graduated with a Bachelor of Science in Banking and Finance from University of London.

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