The wall of worry | 25 August 2023

#SP500:

August historically has been a weak month for markets and it isn’t surprising that after a big rally to start the year, that traders would take a breather. The latest weekly data from the American Association of Individual Investors showed that individual investor sentiment plummeted over the last week from fairly bullish to pretty neutral as the market and economic environment so far in August caused bulls to disappear and bears to come out of hibernation. The number of risks facing markets and the economy have started to dent investor confidence. As the stock market became more stretched in June and July, investor confidence approached extremely bullish levels. The recent cooling has left sentiment neutral for stocks, but should the “wall of worry” scare off more bulls, sentiment may become a catalyst for stocks once more from a contrarian perspective.

Trading recommendation: sell 4399 and take profit 4295.

XAUUSD:

The 10-year U.S. Treasury remained near recent 16-year highs as investors believe that the Fed may maintain a hawkish stance amid decelerating inflation. After this week’s FOMC minutes, traders believe that the Fed could maintain a hawkish stance longer-than-anticipated. High yield bonds also lost ground and are still positive year-to-date as credit conditions tighten and defaults climb. Investment grade corporate bond spreads are 0.05% from their year-to-date tightest level as key data including the Fed, Q2 earnings, and July economic data all have come and gone with generally positive outcomes for markets. The soft-landing narrative has become mostly/fully priced in so any outcome other than this will likely push spreads higher. This is a negative signal for precious metals.

Trading recommendation: sell 1905 and take profit 1880.

#WTI:

Oil prices rose after falling for three straight sessions, as the dollar weakened and China's central bank sought to bolster the property market and wider economy. China's central bank said it would keep liquidity reasonably ample and maintain precise and forceful policy to support economic recovery against headwinds. Oil traders like the fact that China isn’t going to tolerate weakness in economic activity. U.S. gasoline stocks however drew to the lowest in more than two months, U.S. Energy Information Administration data showed. Weekly products supplied, a proxy for demand, rose to the highest since December.

Trading recommendation: buy 80.15 and take profit 82.80.