One Trader's "Ultimate Guide To Navigating The Equity Markets"

This remains a market in which traders are, for lack of a better word, "confused" (another good word is "paralyzed" as we observed one month ago).

For the latest confirmation of this, look no further than Bloomberg's macro commentator (and former hedge fund manager) Richard Breslow, who in his latest macro note admits that "truth be told, there are very few of us who know what’s going on with the equities markets." The other problem is that despite all the "fundamental analysis, valuations, metrics and the like" by financial professionals, the market appears to move in jagged discontinuities, with little logic or rationale, immune to the best financial "hot takes." 

Inevitably, Breslow writes, "the market doesn’t carry through as promised and it’s inevitably made clear that it has nothing to do with that day’s investing thesis but some nefarious and exogenous influence."

Almost, as if, it's all in the hands of central bankers... Or maybe not that nefarious, and risk prices simply act as they (illogically) would in a robot-eat-robot, or perhaps algo-eat-algo, world (a perverse cannibalization that has been puzzling the FT recently).

The good news, is that Breslow believes he may have stumbled on the solution to everyone's problem: how to trade this painfully rangebound, seemingly irrational market:

So put all this aside and concern yourself with how each equity market is behaving around its 21- and 55-day moving averages. Almost every index respects these indicators and traders should love the opportunities presented when the two lines cross. All the words you hear mean little if you’ve not been given the sign.

The P&L punchline: "Risk off is when the 21-dma crosses lower versus the 55-dma. That’s when you know you should be scared. When the opposite occurs, feel free to go back to ignoring the front page news."

While Breslow highlights just how predictably responsive to this 21/55 narrative both the EURUSD and USDJPY have been the big test will be ES, which while stuck in a tight range, may be about to break out:

Two weeks of a lot of noise seemingly signifying nothing has caused the 21 to inch stealthily lower and it hovers, as we speak, 5 points above the 55. If, not when, they cross it’s likely that you’ll have a clearer sense of what to do. Nota bene, close but no cigar, doesn’t score points in this particular game.

Will investing, and trading, indeed be as simple as Breslow makes it appear? The answer should emerge in just a few days when the S&P's 21- and 55-DMA cross. The result could be violent.

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Richard Breslow's full note below:

Truth be told, there are very few of us who know what’s going on with the equities markets. On any given day, they’re going to collapse, never go down again or must be sold or bought on any strength or weakness, as the case may be. And, like congress, many, if not most, people hate the group as a class (index) but love their personal representative (sure winner). The simple truth is that this asset class’s fate is being clouded by the fact that the question is being framed all wrong. And as scientists of the market we should know better than to forecast (kind choice of words) market direction while ignoring the maxim, “garbage in, garbage out.” 

 

Day in and day out we’re inundated with analyses of valuations, metrics and the like. We get our regular instant armchair take on the latest geo-political outrage. After all, who understands this stuff better than foreign exchange salesmen? And a lot of time we’re just simply exhorted to love or hate a given bourse based on the perceived charisma or odiousness of the head of state.

 

Macron’s dreamy, so of course after he rewrites the utterly entrenched labor laws of France, overhauls the economy into a hotbed of innovation, he will turn his full attention to European-wide structural problems. Rumor has it, he can also make an incredible vegetarian foie gras. How can you not be optimistic about everything Europe? Other leaders must be given no quarter on any issue as a matter of principle. I mention this only because if you look at a chart of the euro versus the dollar, yesterday’s spike and subsequent failure above 1.20 looks distinctly like a middle-finger pattern.

 

Inevitably, the market doesn’t carry through as promised and it’s inevitably made clear that it has nothing to do with that day’s investing thesis but some nefarious and exogenous influence.

 

So put all this aside and concern yourself with how each equity market is behaving around its 21- and 55-day moving averages. Almost every index respects these indicators and traders should love the opportunities presented when the two lines cross. All the words you hear mean little if you’ve not been given the sign.

 

Risk off is when the 21-dma crosses lower versus the 55-dma. That’s when you know you should be scared. When the opposite occurs, feel free to go back to ignoring the front page news.

 

The euro has been on a tear since April. How do you know when it starts to be a relative performance issue for European stocks? The end of June, just as soon as the technical signal flashed.

 

Is USD/JPY weakness becoming a problem for Japan? Let’s see, but be aware the lines crossed yesterday.

 

Which sets up a really interesting question. The one you all actually care about. The S&P 500 looks like it’s stuck in a tight range. Where it goes nobody knows. Follow the lines. Two weeks of a lot of noise seemingly signifying nothing has caused the 21 to inch stealthily lower and it hovers, as we speak, 5 points above the 55.

 

If, not when, they cross it’s likely that you’ll have a clearer sense of what to do. Nota bene, close but no cigar, doesn’t score points in this particular game.

 

Don’t you wish all of life was this easy?