“European stocks were flat on Tuesday despite a backdrop of more positive coronavirus vaccine news from Moderna on Monday.” (Reuters) US markets are also down today. The market has rallied hard on vaccine news over the last week and it’s now getting priced in. So, will stock markets correct?
CNBC’s Jim Cramer noted that investors are behaving differently during the stock market’s pandemic-era rally which he has never seen in his career “They don’t seem to want to sell. They see good news and then they buy, and then no one comes forward to sell. It is rather remarkable. We haven’t seen this pattern ever.” We have not and the young investors who are trading huge volume on platforms such as Robin Hood, Ameritrade, etc are not used to losing and continue to buy:
Cole Smead, president of Smead Capital Management noted in terms of retail investors: “They are buying bullish call options that expire inside two weeks. There was ($500 billion) of bullish call options bought in a four-week stretch. In ’99 it was $100 billion, in ’07, it was $100 billion.” The huge amount of call options retail traders has bought which are near a record number should limit upside as they expire.
In terms of the spike tail high on the SP500 chart below and if we cannot take it out this week, we would expect a correction that would firm the USD. Even if we do move higher, we do not see much downside for the USD from current levels due to the market remaining heavily short the USD as per the positioning chart below. Also, as we noted yesterday the DXY is still holding support.
USD/CAD USD/CHF – Boring Price Action for Now But Potentially Big Move Coming
In term of the USD v major currencies volatility is very low and updated a couple of pairs – USD/CAD ( Support 1.30) and USD/CHF (support 0.900) the USD is a buy off support or on strength as per charts below. The drop in volatility warns of a big move and we think it will be to the upside.
SP500 Index: We saw prices exhaust last week on the candle tail back below the previous multi year high in September but have moved back above the level to try and get above it – If we fail and break support (second level) we would expect a move down to 3400.00 then 3200.
USD/CAD DAILY CHART KEY SUPPORT 1.300: We have a major support level which was taken out last week but the selling exhausted and we see the USD as a buy back to support or on a break of yesterday’s open. Downside selling is expected to exhaust, and a rally is expected to correct the USD’s oversold condition to 1.3400 with a possible run on to 1.3700.
USD/CHF DAILY CHART KEY SUPPORT 0.900: We bounced after moving slightly through support and view the USD as a buy off the level or on a break higher. Major weakness in this pair below 0.900 is not expected due to speculators holding their biggest short position in over a decade. We expect a move up to 0.9400 with a possible run on to 0.9600 to correct the USD’s oversold condition.
USD Positioning Chart
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