Time to Reload S&P 500 Shorts?

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Momentum models have performed best for NZD/USD (+2.5% WoW) and GBP/USD (+2.4% WoW) over the past week.
• By asset class, FX continues to fare the best having returned +3.1% over the past three months, on average.
• Momentum models turned bearish on the S&P 500 and bunds, while Euro strength (vs SEK and NOK) has faded.

Latest Signals

Equity momentum models turned bearish on the S&P 500 and net-bearish on the FTSE 100 as the three-month lookback models flipped to signal ‘sell’ (Chart 1). Meanwhile, momentum models remain strongly bearish on the DAX and net-bearish on the Nikkei.

Momentum models have increased their bearishness on bunds, with the three-month lookback model flipping to signal ‘sell’. Meanwhile, they remain strongly bearish on all US rates and long gilts, and net-bearish on JGBs.

Within FX, short-term euro strength is fading; the three-month lookback model for EUR/SEK has flipped to signal ‘sell’ while NOK/SEK has flipped to net-bearish. We do note, however, that these two models have returned the least across G10 (Chart 5).

Model Performance

Three of four equity momentum models (DAX: +1.8% WoW; S&P 500: +1.4% WoW; Nikkei: +0.6% WoW) registered positive returns over the past week (Chart 3). However, over the past three months, momentum models have only positively performed for the FTSE-100 (+0.1%).

Rates momentum models performed best for gilts (+1.8% WoW) over the past week where they have also performed best over the past three months (+4.5%; Chart 4).

In FX, momentum models for NZD/USD (+2.5% WoW) and GBP/USD (+2.4% WoW) performed best over the week, but the bearish EUR/USD momentum model (+1.5% WoW) is the best-performing model over the past three months (+5.7%; Chart 5).

Our Views

Equities remain an asset class under pressure, but there is space to be overweight. John thinks the energy sector is ‘cheap’ and prefers to hold XLE, VDE, and XOP ETFs.

In the US, the Federal Reserve hiked the Fed Funds rate by 75bp, as Dominique had long expected. However, they likely maintain this pace into November, faster than Dominique had expected. She reiterates her call that the FFR could be close to 8% by mid-next year. Meanwhile, in Europe, the Bank of England hiked by 50bp and voted to begin active gilt sales from 3 October, as Henry expected. He continues to expect a dovish pivot in November – though tomorrow’s fiscal announcement may change things.

In FX, EUR/USD has moved to its lowest levels (we remain short, with a target of 0.90) while Japan announced FX intervention on the day the Bank of Japan stayed dovish. We look at whether JPY intervention will work and what we can learn from past FX interventions.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 months, you buy, otherwise you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)