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Market Overview

Flipped Upside Down

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Hi Everyone,

After weeks of uncertainty in the stock markets and a relief rally yesterday, investors now have fresh cause for concern.

It seems the US bond markets are flashing fresh warning signs that the economy is about to take a turn for the worse.

When the yields of the 10-year bonds go lower than the yield on the 2-year, it has in the past been a strong indicator that a recession is coming. Well, that hasn’t quite happened yet, but we did get an inversion yesterday of the 3-year and the 5-year for the first time in a decade.

Though the 3-5 spread is not as strong an indicator as the 2-10, it’s still not a very good sign. In this graph, we can see that even though a 3-5 inversion doesn’t always lead to an immediate recession, it can still be considered as an early indicator.

This should come as no surprise to those who are reading these updates regularly. As we’ve been saying, just about every stock mogul and their brother have been predicting that we’re nearing the end of the bull cycle.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • More Inversion Markets
  • Scaling Into Positions
  • Bitcoin Getting Easier

Please note: All data, figures & graphs are valid as of December 4th. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

In the crypto market, we’ve seen a fair amount jostling for position among the top three assets by market cap.

It seems a similar dynamic is now playing out in the stock market as Apple, Amazon, and Microsoft are in a close running for the top spot.

This chart from the Financial Times shows the respective market caps of the top four tech stocks…

The FAANG stocks have all come down significantly from their all-time highs, with some falling harder than others.

Perhaps this is not surprising as many of these companies were previously priced for perfection, but the question now becomes at what point do they bottom out?

Scaling Into Positions

With the above in mind, and with the recent downturn in crypto prices, I thought it relevant to highlight an old strategy in the market that may now be relevant for investors who are currently sitting on the sidelines and looking to get in.

The problem is that we never really know when the bottom will come and it’s impossible to time the markets perfectly, but there are options you can explore to increase your chance of success from your investments.

For your convenience, I’ve now published a blog on eToro outlining a simple strategy called Dollar Cost Averaging and the advantages of spreading out your orders in order to take advantage of markets that are low now but might go lower.

Feel free to read it here: www.etoro.com/blog/market-insights/a-simple-strategy/

Let me know what you think.

Bitcoin is Getting Easier

There’s been a lot of talk lately about the decrease in mining activity in bitcoin and we’ve discussed it in these updates already. However, it seems this story has taken on a new form that I feel is worth revisiting.

Yesterday, this opinion post was published on Market Watch, which saw the crypto community in an uproar on social media last night.

In the article, Economist Atuyla Sarin describes what he calls the Bitcoin Death Spiral, where he predicts that the hashrate of bitcoin could drop so suddenly that it would no longer be profitable for miners to operate and all at once they could shut down, effectively killing the Bitcoin network.

This theory isn’t new. In fact, here’s an article published on February 5th, 2015 that explains the phenomenon quite well…

The point to note here is that the publish date was almost exactly at the bottom of the last bitcoin cycle, just after it had come down from a high of around $1,200 and was trading at just $220 per coin.

For a full explanation of what the bitcoin death spiral theory is, please see the expert Andrea Antonopolis who has responded to these claims in a video last night.

To be clear, it is extremely unlikely for such an event to occur, simply because any time a miner does shut down their rig it makes it more profitable for all other miners to continue their operations.

In fact, thanks to the recent reduction in hashrate the bitcoin mining difficulty has just been re-adjusted. So anyone who did drop out lost out and those who remained are far better off.

You see, Satoshi Nakamoto wasn’t a fool. There are always new people coming into the crypto space and that’s why these type of stories tend to re-emerge. When a newcomer grasps a specific concept, they can sometimes fail to consider the wider implications of their line of reasoning.

But that’s Ok. Those who are interested will learn and today’s newcomers will become tomorrow’s experts.

Let’s have an amazing day ahead.

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

eToro is a multi-asset platform which offers both investing in stocks and cryptocurrencies, as well as trading CFD assets.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,
Mati Greenspan
Senior Market Analyst

Connect with me on….

eToro: @MatiGreenspan | Twitter: @MatiGreenspan | LinkedIn: MatiGreenspan | Facebook:MatiGreenspan

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

5 Things To Watch Next Week + ChartBook

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Last Fed Rate-Hike of the Cycle?

EUR/USD, 4-Hour Chart Analysis

The Federal Reserve will announce its rate decision on Wednesday, and according to the consensus on Wall Street, the central bank will deliver the fourth rate hike of the year. The huge shift of the last couple of months in the US bond market means that now, no additional tightening steps are “priced in” for 2019.

The bearish shift in global stocks and the mounting evidence regarding a global economic slowdown confirm that view, but we still have doubts about the intentions of the Fed. While it’s true that yield curve is about to invert and the global slowdown will eventually affect the US economy, for now, the numbers remain solid, and the Central Bank might use these conditions to raise rates further in order to have “firepower” in the case of a recession.

That could fuel another strong leg higher in the USD, but in any case, the foundations of the Dollar’s rally are still strong, with the record deficits only affecting the currency’s long-term outlook in our view. Even if a stronger pullback is still possible, we expect new lows in the EUR/USD and new highs in the Dollar index in 2019.

China in Focus as Economic Slowdown Accelerates

Shanghai Composite Index CFD, 4-Hour Chart Analysis

This week’s Chinese economic releases were quite scary for bulls, as both Industrial Production and Retail Sales missed by a mile, which is unusual in the history of the country. The Chinese stock market has been one of the first to enter a bear market during the broad bearish shift, and even though a trade deal with the US got closer, equities failed to rally substantially off their lows.

The Chinese Yuan is also very close to its lows, and should the slowdown further accelerate, the country’s financial system and the currency could get under heavy pressure given the extent of the credit bubble of the past years. With that in mind, the fate of the Chinese market is crucial for risk assets globally, and a break below the prior lows would be another nail in the coffin of the US bull market as well.

Another Big Week for the Pound

GBP/USD, 4-Hour Chart Analysis

The Brexit chaos pushed the Great British Pound to its lowest level since early 2017 against the USD, and from a technical perspective, we could be looking at a test of the 1.20 level in the near future. Looking at the possible outcomes of the Brexit saga, a new referendum, a no-deal Brexit, or a renegotiated deal, uncertainty is extremely high, and unless the May-government finds a quick solution, further steep losses are likely ahead for the currency.

Several key economic releases will also be coming out next week, such as the CPI and PPI indices on Wednesday, the final GDP and the Current Account balance on Friday, while Thursday’s Retail Sales report be out just before the Bank of England’s rate decision, so forex traders could be in for another very active week in the Pound-related pairs.

Financials Signaling Trouble Across the Globe

XLF, 4-Hour Chart Analysis

The month’s most interesting market trend is the plunge in financial stocks, which continued unabated even as trade war fears subsided somewhat. The pressure on the major European banks has been apparent for a while now, and as the quantitative tightening is gaining speed, their US peers also got hammered in December. Some analysts point at the excesses of the leveraged loan market and the collapsing yield curve, but most likely the funding squeeze is at the root of the problem.

The XLF ETF firmly entered bear market territory and fell to its lowest level since mid-2017 this month, and although the broad rising trend remains intact in the sector, given the global technical picture, we would only look for short-term long positions. We continue to view all rallies as selling opportunities in equities, and the fact that more and more crucial sectors confirm the downturn is another bearish sign.

A Slew of Key Economic Releases on the Last Full Week of the Year

We will have a busy regarding the global economy even besides the Fed meeting and the British releases, with the US and Canada providing the most important indicators. The German IFO index, and US Building Permits and Housing Starts will highlight Tuesday’s session, the Canadian CPI will be out on Wednesday, followed by the Australian Employment Report and the BOJ’s rate decision on Thursday.

The Canadian GDP and Retail Sales will be released on Friday, and the US Durable Goods report will also be out, and following several months of disappointments, a positive surprise could cause a jump in the Dollar, especially we will have a hawkish surprise delivered by the Fed.

ChartBook

Major Stock Indices

S&P 500 Futures, 4-Hour Chart Analysis

Nasdaq 100 Futures, 4-Hour Chart Analysis

Dow 30 Futures, 4-Hour Chart Analysis

VIX (US Volatility Index), 4-Hour Chart Analysis

DAX 30 Index CFD, 4-Hour Chart Analysis

FTSE 100 Index CFD, 4-Hour Chart Analysis

EuroStoxx50 Index CFD, 4-Hour Chart Analysis

Nikkei 225 Futures, 4-Hour Chart Analysis

EEM (Emerging Markets ETF), 4-Hour Chart Analysis

Forex

USD/JPY, 4-Hour Chart Analysis

EUR/GBP, 4-Hour Chart Analysis

AUD/USD, 4-Hour Chart Analysis

Commodities

 

WTI Crude Oil, 4-Hour Chart Analysis

Gold Futures, 4-Hour Chart Analysis

Copper Futures, 4-Hour Chart Analysis

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 419 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Market Overview

Signs of Slowing China Rattle U.S. Stocks; Cryptos on the Verge of New Lows

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U.S. stocks sold off anew Friday after Chinese retail sales data pointed to a severe slowdown in the nation’s consumption-oriented growth, triggering fresh concern over the health of the global economy. Meanwhile, the cryptocurrency market approached $100 billion for the first time since August 2017, a level that would have seemed unfathomable just six months ago.

Learn more about the factors that influenced the market in our weekly review.

Hard Fall on Wall Street

The benchmark U.S. indexes fell hard in the final session of the week. The Dow Jones Industrial Average plunged 496.87 points, or 2%, to close a 24,100.51. The Dow 30 is down a staggering 2,700 points from its October peak.

The much broader S&P 500 Index fell 1.9% to 2,599.95, the lowest in over eight months. All 11 primary sectors finished in the red, with health care and energy stocks leading the market lower. Health stocks plunged by an average 3.4%. Shares of energy companies were down 2.4%. Information technology and consumer staples also posted heavy losses.

A hard slide for information technology dragged the Nasdaq Composite Index sharply lower. In doing so, the tech-heavy index nearly joined its counterparts in negative territory for the year. The Nasdaq closed at 6,910.67, having lost 2.3%.

The CBOE Volatility Index, also known as the VIX, rose in the final session of the week, painting a grim picture for Wall Street over the next 30 days. VIX climbed 4.8% to close at 21.63 on a scale of 1-100 where 20 represents the historic mean. The so-called “fear index” has gained a whopping 87% this year.

Investors are exiting U.S. stocks in nearly record fashion, according to Bank of America Merrill Lynch. In a note obtained by Bloomberg, the bank said U.S. equity funds have experienced their second-biggest run in history, bleeding $27.6 billion through Dec. 12. As Bloomberg notes, the bloodbath on Wall Street has erased up to $4 trillion in U.S. stocks since the end of September, a period that was characterized by record highs.

China’s Cause for Alarm

Once again, China was at the center of the selloff on Friday after Beijing reported the biggest slowdown in retail sales in over 15 years. Receipts at Chinese retail stores rose just 8.1% annually in November, which was well below forecasts calling for 8.8%. Industrial production also languished, rising just 5.4% annually during the same month.

The world’s second-largest economy is in the midst of a multi-year cooldown marked by slowing industrial output and a gradual shift away from export-oriented industries. This is part of a much broader strategy to transform China into a consumer-oriented economy. However, heavy reliance on traditional smokestack industries remains a focal point to the nation’s short-term economic well-being.

China remains heavily dependent on exports, which means it relies on a strong U.S. economy as a destination market. This has given the Trump administration considerable leeway in pressuring Beijing to reform its trade policies. China and the U.S. have made considerable progress on trade talks in recent weeks but a comprehensive deal has yet to be reached.

Cryptos Locked in Bearish Retreat

Cryptocurrency prices on Friday touched new lows for the year, offering little doubt that a new bear-market bottom was around the corner. The combined value of all coins in circulation fell to $102 billion, the lowest in 16 months.

Bitcoin’s price briefly fell below $3,200 for the first time this year, extending its daily loss to more than 4%. The leading digital currency is down roughly 5% for the week, though its share of the overall market continues to grow amid a mass exodus from altcoins.

XRP, Ethereum and EOS each recorded declines of at least 3% on Friday; Stellar XLM was down 9%, falling below 10 cents for the first time this year.

With the exception of Tether, a dollar-backed stablecoin valued at $1.00, all cryptocurrencies in the top-20 were down at least 4% during the session. Twentieth ranked Maker (MKR) was the biggest laggard, falling 13% on the day.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 701 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Analysis

Forex Update: Dismal Chinese Data Causes Turmoil in Markets

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Forex Market Snapshot

Asset Current Value Daily Change
EUR/USD 1.1302 -0.47%
GBP/USD 1.2571 -0.68%
USD/JPY 113.35 -0.21%
AUD/USD 0.7179 -0.66%
GOLD 1,243 -0.20%
WTI Crude Oil 51.16 -3.18%
BTC/USD 3,180 -2.54%

We continue to have an unusually active December in traditional financial markets, as the recent bearish shift, the continued Brexit woes and the slowing global economy add up to a very nervous trading environment. Volatility is especially high in stock markets compared to seasonal averages but currencies are also having very active days, with the Dollar clearly being in focus.

Today we had negative headlines in China with both industrial production and retail sales missing the consensus estimates by a mile, and the history of manufactured economic releases from the country makes that even scarier.

It’s no surprise that the Chinese stock market is leading the way lower globally, while the Chinese Yuan is also among the weakest currencies globally, even amid the improving trade-related sentiment. Risk-on currencies got it hard today, and the Dollar is defying its bearish seasonality, trading very close to its recent lows, confirming the broad risk-off shift.

Technical Analysis

GBP/USD, 4-Hour Chart Analysis

The Great British Pound continues to trade with pronounced relative weakness, and as Prime Minister Theresa May was sent home empty-handed from Brussels, with the leaders of the EU refusing to renegotiate the draft Brexit plan, the currency’s position just got even shakier.

From a technical standpoint, the Cable confirmed the key breakdown with a failed pullback in the past couple of days, and with no major support found above the generational lows near 1.20, long-term odds now favor a test of that zone, and bulls shouldn’t enter positions below the key 1.27 level.

EUR/USD, 4-Hour Chart Analysis

The EUR/USD pair dipped below the 1.13 level after yesterday’s the dovish growth and inflation forecast by the European Central Bank and today’s strong US Retail Sales report. The US economy continues to perform relatively well compared to its global peers, and although we think that the slowdown will eventually reach the US, the fiscal stimulus and the labor momentum could keep the engines going for a while.

That only adds to the buying pressure which is pushing the USD higher, and the troubles in the European financial system are also mounting, which could lead to another leg lower in the common currency next year. The main technical levels to watch are still the 1.12 support and the 1.1440 resistance, and with the broader downtrend clearly being intact in the most traded currency pair.

AUD/USD, 4-Hour Chart Analysis

The AUD/USD pair fell below the bearish wedge pattern on the negative Chinese news as we expected, and it’s now testing the 0.7165 support zone. A move towards the 0.70 level is likely in the coming weeks, should the pair violate the support zone, and the short-term trend change is close to being confirmed, while the broader downtrend is clearly intact, with strong resistance ahead near 0.7250 and 0.74.

WTI Crude Oil, 4-Hour Chart Analysis

Another rally attempt faded away today in crude oil, and the crucial commodity continues to trade in a bearish consolidation range following the series of dead-cat-bounces. The top of the range is found near the $54.25 per barrel price level, while strong support is found in the $49.50-$50 per barrel range.

Given the deeply oversold long-term momentum readings, bulls can open speculative long positions near the bottom of the range, despite the clearly intact long-term downtrend, while bears should wait for a larger scale bounce to reenter the market.

Key Economic Events on Monday

ChartBook

Forex

USD/JPY, 4-Hour Chart Analysis

EUR/GBP, 4-Hour Chart Analysis

EUR/JPY, 4-Hour Chart Analysis

AUD/JPY, 4-Hour Chart Analysis

GBP/JPY, 4-Hour Chart Analysis

USD/CHF, 4-Hour Chart Analysis

USD/CNH, 4-Hour Chart Analysis

Commodities

Gold Futures, 4-Hour Chart Analysis

Copper Futures, 4-Hour Chart Analysis

Major Stock Indices

S&P 500 Futures, 4-Hour Chart Analysis

DAX 30 Index CFD, 4-Hour Chart Analysis

Nikkei 225 Futures, 4-Hour Chart Analysis

Shanghai Composite Index CFD, 4-Hour Chart Analysis

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 419 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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