Market analysis for the week of September 12, 2022. The analysis focuses on major market indexes, ETFs, commodities, and forex. Access to the full article requires a Premium Articles or an All in One subscription.
- In the last report we introduce a section for strategy ETFs. Interest in these ETFs is growing for use in diversification strategies. In this report, we include a basic allocation using one of the ETFs.
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- Weekly Summary.
- Market Performance Recap.
- Major Market Indexes.
- Equity Index and Fixed Income ETFs.
- Commodity ETFs and ETNs.
- Strategy ETFs
- Spot Currency Pairs.
- Charts to watch.
1. Weekly Summary (September 6 – September 9, 2022)
- Stocks rebounded after a three-week loss of 8.3%.
- Bond prices fell amid expectations of higher rates.
- Commodities were down but off their lows of the week.
- Crude oil and gold spot prices were little changed.
- The US dollar fell against major currencies.
Large-cap stocks ($SPX) rallied 3.6% in the holiday-shortened week after falling for three weeks in a row with a combined loss of 8.3%. The Dow 30 ($DJI) gained 2.7%. Tech stocks ($NDX) and small caps ($RUT) jumped 4%. The S&P 500 high beta index ($SP5HBI) surged 6.4%, while the S&P 500 low volatility index ($SP5LVI) added 2.7%
US Treasury Bonds ($SPBDUSBT) fell 0.6%. The 10-Year Note yield gained 13 basis points to 3.32%. Crude oil (@WTI) spot prices ended the week unchanged after recovering from a 5.5% loss. Spot gold (@GC) was slightly up by 0.1%. The CRB index ($CRB) fell 0.1%. The US dollar index ($USDX) was 0.5% lower against major currencies.
Year-to-date, the NASDAQ-100 is down 22.9% and 24% below its all-time highs. The Russell 2000 is down 16.1% year-to-date and 22.9% below its all-time highs. On the positive side, the CRB index is up 22.3% year-to-date and the crude oil spot is up 15.8. The US dollar index is gaining 13.9% year-to-date.
The ensemble of our six systematic strategies is down 4.5% year-to-date, compared to a 14.7% loss for the S&P 500 index and a loss of 12.8% for the 60/40 portfolio with SPY and AGG ETFs.
Below is an excerpt from this week’s systematic trading report:
Mixed signals and complacency were the main drivers of the rally in stocks. Investors expect the best of all possible worlds: a dovish Fed, lower inflation, and no recession. A “U-shaped recovery” is the latest buzzword used by some analysts. The perception is that the worst is over. There are high expectations for a lower CPI number next week.
The best signals are delivered by the markets, and this week we noticed that despite the rally in stocks, long-duration bonds fell and yields rose. An engineered lower CPI through the release of strategic petroleum reserves may not be enough to cool inflationary pressures in the medium term. Historically, inflation is structural, sticky, and has large swings as the economy tries to find a new stable state.
There is a definitive plan to boost the economy and lower inflation before the midterm elections. Historically, this is done by all governments, but “this time is different” due to special circumstances. In the short-term, success is nearly guaranteed, so equities will probably go higher from here. The bond market is not buying it. Bond traders are traditionally more sophisticated than equity traders.
Volatility remains elevated. The S&P 500’s 21-day annualized volatility is 19.8%, while implied volatility, as measured by the VIX index, is 22.8%. The risks of left-tail events are still high, and investors are careful with exposure to stocks.
The risks of momentum and other systematic approaches to equity and commodity trading have also increased, with higher risks of whipsaw. There are nearly three and a half months left until the year ends, and a good fraction of unrealized gains may evaporate. Note that the popular 12-month price series momentum long-only strategy in SPY ETF is down 13% year-to-date, and this would be the largest yearly loss if this was the end of the year. The SPY ETF must cross the 12-month moving average, currently at 426.54, for a long trade to be triggered and the loss to be reduced. However, if prices reverse afterward, there is a possibility that losses for the year will grow. Even systematic trading is not immune from the capital destruction process of this year.
2. Market Performance Recap
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Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No updates to charts will be provided if market condition changes occur that affect the levels on the charts and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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