Market Outlook: Monday 29 June 2020
1. Outlook for SPX
· State-based model outputs:
o Composite Long-Term economic/market cycle: “Buy the Dip”
o Hidden Markov Model Market Regime: “Buy the Dip: Amber Alert”
o Composite Global Equity Market Sentiment: “Bullish: Declining”
· The Composite LT Cycle suggests a tail-wind for the market until October 2020 and then a head-wind will slowly build up (chart included).
· The Composite Medium-Term Cycle may provide an offsetting tail-wind in Q4 2020 but this too reverses in early January 2021 after which the market may be in some trouble.
· The regime detection model also suggests a tail-wind for the market but with an alert to protect longs against sharp and large drawdowns.
· The same cautiously-bullish tone is reflected in the Composite Sentiment Indicator (chart included)
2. Positioning
· Stocks:
o Long German stocks as of Friday close through EWG option structures to Oct-2020 and Jan-2021
o Long US stocks as of Friday close through SPY ETF and option structures to Aug-2020
o Long a smidgen of SPX ‘crash puts’ to Aug-2020 as of June expiry
· Crude Oil:
o Long Nov/Dec puts as of June 19th (reason in next weekend’s report)
· Precious Metals:
Long physical Gold/Silver and paper Gold…always long and looking for opportunities to add.
Chart key:
a) Composite LT Cycle State: Light-red/green shaded regions encompassing price history and projected to 2022 are derived from a composite of long-term economic/market cycles.
b) MDP State: Multi-coloured band at the top is the history of states/regimes from a Hidden Markov Model. There are 4 market regimes, namely:
I. BUY THE DIP — Green
II. MIND THE SQUEEZE — Blue
III. SELL THE BOUNCE — Red
IV. BUY THE DIP: AMBER ALERT — Yellow
c) MDP Optimal Policy: Darker red/green band in the middle of the chart. This is exactly 2 above but shaded with the actions from the optimal policy an agent would take given the transition dynamics and the averages rewards/returns i.e. the actions (buy/sell/hold) that maximise expected reward. Regimes I, II and IV are green (bullish) and III is red (bearish)
d) Projection Cone: To the far right beyond the last market close:
i. I sample states/regimes from the Hidden Markov Model conditional on the Composite LT Cycle
ii. I sample returns from the historical distribution conditional on both the Composite LT Cycle AND the HMM Regime and perturb them with random Gaussian noise
I do this a gazillion times and chart the mean and standard deviation bands up to 3-sigma
3. Scenario Analysis
· How big can the so-called dip get?
o A second leg of an incomplete decline from the recent peak could target support levels in the 2800s: 2880, 2855 and 2840 (major).
o Near-term support for a shallower and more complex correction comes in at 3000, 2980 (major), 2940 (major) and 2920
o A deeper setback linked to a reversal in Crude (to be discussed next week) would target the cluster around 2700.
· The idea is to prudently buy into said levels with aggression determined by the above model outputs. So far I have used the 2980 major level to initiate longs and the 3000 level to add.
· The medium-term cycle suggests a tail-wind from late-June into mid-July.
· With the news-flow increasingly turning negative again and talk of large month-end re-balancing (net sale of stocks) we may be at or near an opportunity for tactical defensive longs.
Disclaimer: Futures, Options, and Currency trading all have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these complex markets. Don’t trade with money you can’t afford to lose and NEVER trade anything blindly. You must strive to understand the markets and to act upon your conviction when well researched. This is neither a solicitation nor an offer to Buy/Sell futures, options, currencies or any instrument. No representation is being made that any account will or is likely to achieve profits or losses. Indeed, events can materialize rapidly and thus past performance of any trading system or methodology is not necessarily indicative of future results particularly when you understand we are going through an economic evolution process and that includes the rise and fall of various governments globally on an economic basis.
CFTC Rule 4.41 — Any simulated or hypothetical performance results have certain inherent limitations. While prices may appear within a given trading range, there is no guarantee that there will be enough liquidity (volume) to ensure that such trades could be actually executed. Hypothetical results thus can differ greatly from actual performance records, and do not represent actual trading since such trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight and back testing. Such representations in theory could be altered by Acts of God or Sovereign Debt Defaults.
It should not be assumed that the methods, techniques, or indicators presented in this publication will be profitable or that they will not result in losses since this cannot be a full representation of all considerations and the evolution of economic and market development. Past results of any individual or trading strategy published are not indicative of future returns since all things cannot be considered for discussion purposes. In addition, Kronos’ analysis is provided for informational and educational purposes only and should not be construed as investment advice or a solicitation for money to manage since money management is not conducted. Therefore, by no means is this publication to be construed as a solicitation of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any such investment.
