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Trader thoughts - it doesn't feel right but is the market still for chasing?

Chris Weston
Head of Research
23 Jan 2023
A tough day for the equity bears or those positioned short risk – but why we’ve seen such upbeat risk flow is the subject of debate – for me, the idea of not overthinking things is advantageous - always trying to justify a move doesn’t offer much edge when trading – it’s about extracting the most out of a trade (if on the right side of the move), but reacting and managing the position if offside. Being wrong is part of the game, but as the old saying goes “just don’t stay wrong”.

The question now is do you chase the move in equity and risk FX?

Personally, I have my views on the moves – I think this is a portfolio shift – the market has been so underweight US equity and long Europe, UK, and China and ahead of big tech quarterly earnings we’re seeing a repositioning – back into big US tech, into growth from value, while cash levels (as a % of AUM) are being drawn down – as detailed in the daily ‘Trader Thoughts’ video (https://twitter.com/ChrisWeston_PS/status/1617615167814270978?s=20&t=h3AQxHjlnmqCSNfchoT_DA), the BoA/ML fund manager survey offers interesting guidance here.

There is nothing to change a market narrative and affect sentiment than a market going up with a increased rate of change and while fund managers don’t like to chase a market, so often strength begets strength – especially when we’re above the 200-day MA and price has finally closed above the Jan 2022 downtrend. The fact NAS100 cash volumes were 39% above the 100-day average shows the flows, especially as the gains came when US treasury yields were up across the curve.

The trade seems to be long NAS100/short UK100 (or short Europe) – although we can do it through individual stocks and ETFs too – long QQQs is a proxy for the tech trade although my preference is to use indices for pairs trades (better leverage and limited gapping risk). We’re also seeing long XRT (retail ETF/short SPY) working well, and I think there is more juice here. Microsoft is the clear catalyst now to the tech trade, where they report after-market in the session ahead – the market expects a -/+4% move on earnings and we know they do have a decent pedigree, having beaten consensus EPS and sales assumptions in 7 of the past 8 quarters.

What is interesting is the flow-on effects in FX markets – buying AUD, NZD or NOK makes sense as they are the high beta risk plays – ok, we haven’t seen much participation from the commodity complex – China is offline for Lunar NY - but as a rule of thumb if growth equity is working then traders will gravitate to buy the AUD. The question here with AUDUSD having broken out and made new cycle highs has this the momentum to test the August 2022 highs of 0.7120? This is where running a simple mechanical stop (such as a 3- v 8-day EMA crossover) keeps you in the trade.  

EURUSD and GBPUSD are less clear as the beta to equity are far lower and one could argue that as US equity outperformed, we’ve seen capital flow to the USD – hence the sell-off from 1.0927.

Chasing rallies never feels right – in fact, most retail traders will feel more compelled to sell the rip (Pepperstone clients are actually skewed perfectly 50/50 on open positions in NAS100) - but consider with Microsoft, IBM and Intel hitting us with numbers this week and the likes of Apple and Alphabet next week – if the bar is still sufficiently low enough and earnings come out topside – a big if of course – then these mentioned dynamics could still have good legs.  

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