S&P 500 down 3.35% month-to-date
Every week, analysts on both the buy-side and sell-side create a plethora of charts and data visualizations to provide context for price movements across different asset classes. This data serves as a valuable tool to shape one’s understanding and can either reinforce existing beliefs or challenge them. Moreover, it can shed light on potential risk/reward opportunities in various markets. Here are five charts that influenced my perspective on the market this week.
1) Is Chinese gold buying signaling a yuan devaluation?
Takeaways: As the yuan continues to weaken against the dollar throughout this year, recent activities in commodities have sparked speculation that China may be gearing up for a significant one-off yuan devaluation. According to Simon White, a Bloomberg macro strategist, the surge in futures gold trading in China, along with the rising net long position, is noteworthy.
Trade implications: In the past, when China devalued the yuan in August 2015, U.S. equity markets reacted by declining. While this was a temporary setback that was eventually overcome, it still presented a significant challenge. If another yuan devaluation occurs, it could trigger further downward pressure on risk assets. Additionally, the substantial accumulation of gold by both Chinese traders and the People’s Bank of China suggests that gold prices might have a higher floor than previously anticipated in the near term.
2) Record outflow in a crude oil fund following cooling off of Israel-Iran tensions
Takeaways: The largest daily outflow on record was observed in the U.S. Oil Fund, the major oil ETF, as crude prices lost some of the geopolitical premium due to the easing of tensions between Iran and Israel.
Trade implications: Despite the record outflows and decreased volatility in crude oil, it does not necessarily mean that oil prices have peaked. Previous instances of significant outflows have preceded prolonged periods of low crude oil prices. There is a possibility that the recent rally in crude oil prices is not yet concluded.
3) Most extreme drop in long equity positioning since October 2023
Takeaways: Recent weeks have seen a substantial decrease in positioning across various entities, reaching levels not seen since October of the prior year.
Trade implications: The drastic reduction in long equity positioning suggests that a short-term low has potentially been established after shaking out weak positions. The clearing out of the overcrowded long market indicates the potential for a rebound in the near future.
4) Net-negative AAII bull-bear spread
Takeaways: The AAII Investor Sentiment survey’s bull-bear spread has entered negative territory once again after several years, signaling a rapid decline in investor sentiment.
Trade implications: With the notable decline in investor sentiment complementing other data trends, it indicates a shift from the exuberance seen in earlier quarters. This shift may pave the way for bulls to regain control of the S&P 500 narrative soon.
5) Bull market resilience despite a recent setback
Takeaways: Despite the S&P 500 experiencing a negative return for the first time in five months, historical data suggests that this is not necessarily indicative of the end of a bull market.
Trade implications: Past instances of a red month after a series of green months have often led to positive forward returns in stocks. This historical pattern, combined with seasonal trends, could indicate a potential rebound for stocks following a brief breather.
