Thin air at high altitude

Trading map dots

20.01.2020 – Daily Report. We could gradually write this market report with copy and paste: Wall Street is setting new records, the DAX is hesitant. And the MDAX has reached another all-time high. But in the meantime, Wall Street looks increasingly overbought – when will the permanent bull market end? Certainly not today, because the US stock market remains closed.

Threatening double top

On Monday morning, the DAX made no move to follow the USA’s lead: The German leading index lost 0.2 percent to 13,505 points. On Friday, the price indicator had made it to 13,558 points. Thus, the DAX was only 41 points below its record high of 13,597 points at the beginning of 2018. Now the bulls had better get going soon, otherwise a double high is imminent. The chart analysis shows that this is a classic sell signal.

Meanwhile, the MDAX reached a new record high at the start of trading, rising to 28,815. Recently, however, it also crumbled, falling 0.1 percent to 28,738 points.

Asia predominantly solid

Asian stock markets rose on Monday on hopes of a recovery in the global economy. The Chinese CSI-300 climbed 0.8 percent to 4,185 points. And the Nikkei closed 0.2 percent higher at 24,084 points. In contrast, the Hang Seng slipped by 0.9 percent to 28,796 points due to new protests in Hong Kong.

Records, records, records

Wall Street had continued its series production of all-time highs on Friday. Dow Jones Industrial, S&P 500 and high-tech indices reached new highs. At the closing bell, the Dow was 0.2 percent firmer at 29,348 digits. In the course of trading, it had pushed the intraday high to 29,374 points. The S&P 500 finally gained 0.4 percent to around 3,330 points. The Nasdaq 100 gained 0.5 percent to 9,172 points.

In the USA the air is getting thinner

The major US indices have now moved a long way from normality, measured by moving averages. Take the Dow as an example: the 50-day line runs at 28,240 points, the 200-day line even at 26,909 digits. The last time the leading index touched both lines was in early October. The 14-day Relative Strength Index (RSI 14) reached oversold territory at 72.62 points. By the way, the high-tech indices have been trading in oversold territory on the RSI for several trading days now.

All this means that a reset is overdue. But when? Probably when unexpected events provide the bulls with reasons to make a killing – such as new Chinese trickery in the customs dispute or an imminent betrayal of Republicans in the Senate during the Impeachment. So be sure to keep an eye on the regular market updates.

It is also quite possible that the cracking of the 30,000 mark in the Dow will cause a final buying frenzy before the hangover sets in. Such a big house number always convinces even the last anxious ones, while the professionals discreetly leave the parquet when the amateurs appear. According to the teachings of Behavioral Science, a headline in the “Bild” would be appropriate, for example according to this freely invented pattern: “Dow 30,000 – so you can get rich with US stocks!”

Bank of America warns of the bubble

Chief Investment Strategist Michael Hartnett from Bank of America just spoke with a similar tone. In his weekly “Flow Show” he stated: “Q1’2020 = Q1’2000”. There is euphoria everywhere. The clearest parallel to the time before the bursting of the dotcom bubble was the emergence of the “Trillion Dollar Babies”, i.e. stocks worth over 1 trillion dollars. This is the direct result of “$12 trillion of QE since Lehman”. In addition, there were “$1 trillion in stock buybacks past 5 years by top 20 US companies (amounting to $381,000 per employee”. Now the S&P 500 “just 5% away from becoming largest bull market of all time (3498) even as the Fed is now stuck and can never again allow stocks to drop as US financial assets (i.e., Wall Street) is a record 5.5x size of GDP (Main St). In short, the entire market is now “too big to fail.”

Derivatives-Hausse with Bitcoin

What remains is a look at another rally: On Friday Bitcoin broke through the $9,000 mark for the first time since November, but recently dropped 0.7 per cent to $8,646. ZeroHedge stated that in percentage terms this was the best start to the year ever registered for the most important crypto currency. The blog “CoinTelegraph” stated that derivatives trading is likely to reach new records this month and that the volume of open interest is rising strongly. No wonder, the CME Group – the world’s largest derivatives exchange in Chicago – had recently launched options on BTC, following its competitor FTX. All in all, the market is hoping for continued recognition of the cryptos by institutional investors, and thus for a virtual knighthood in the financial world. Let’s wait and see.

What the day brings

The diary is quite sparse today. You can find the overview here: Market Mover
The Bundesbank’s January monthly report is due at 12.00 noon.

And at 14.00 the International Monetary Fund gives its outlook.

Wall Street remains closed for Martin Luther King Day.

The Bernstein Bank wishes successful trades and a good start to the week!


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