In-depth Analysis

What do I look at and why?

 

In one of the trading discords, I am a member of I was asked a question about what markets I look at daily, and why I choose to look at that data in preference to other markets and indicators.

It’s an excellent question and one that gives me chance to explain something about my process, what interests me, and what I am looking for when I am studying the markets.

 

Top-down view 

I have to say first off that the older I get the more of a top-down approach I find myself taking. And as I am pretty old that means I am often looking at the bigger picture, which means that I am looking at global macro data and geopolitical news and events.

 

Trading Economics

 

Though that study doesn’t necessarily generate trading ideas in itself, it does provide me with a framework or background against which to measure my trading ideas. An obvious example of just how this works can be found in rising energy prices and the strength of the US dollar, seen over the last year and more.

Just to be clear Dollar strength exports inflation and rising energy and commodity prices compound that effect.

It’s something that’s shown up in both developed and developing economies, the effects of which I highlighted in this article, on yen weakness, published, in late March.

The continuous freefall of the Yen

Building a Framework

Once you have created your train of thought about the macro background then you can start to test trade ideas against that background.

And that is exactly what I was doing in this Linkedin post from June, which focused on the issues facing German industry, and the chemicals giant BASF in particular.

 

 

Equity Markets
The question posed to me on discord today was posted in an equity chat, and in particular, the chat member wanted to know more about my approach to equities/equity indices.

I look at a list of some 20 major equity indices with members from Europe, the UK, the US Asia Pacific and Latin America. However, I mostly focus on that list on an EOD, or end-of-day basis.

Intraday, I focus on a far smaller list. That shortlist is made up of three US indices and three or four European markets. They are the S&P 500, Nasdaq 100 and Dow 30, The FTSE 100, the Dax 40, the CAC 40, and Euro Stoxx 50 indices.

 

Why those particular markets?

Well firstly the US equity market accounts for as much as 60% of global market capitalisation and the S&P 500 is around 80% of the total USD equity market cap.

So what happens to the S&P 500 matters to both the US and global equity markets at large.

I look at what’s happening in the broad-based S&P 500 to get a view on breadth or participation in a given move, and at the Nasdaq 100 to get a handle on the momentum and Risk-on /Risk-off sentiment. The index is largely comprised of technology and growth stocks and so it’s ideally suited to that task.

I look at the UK and European markets because that’s where I am geographically based and the timezone I am situated in.

Paris has recently surpassed London, as being the largest European stock market.
Germany is (or was?) Europe’s powerhouse economy and it is home to many of its largest industrial companies.

The Euro Stoxx 50 captures the performance of the largest quoted companies from across Europe, and as such it provides an “at a glance” indicator of trader sentiment in those markets.

When I examine these equity indices I tend to use 15-minute or hourly charts. Typically I start with a line chart with one or two moving averages that help to provide context.

 

 

If I want to drill down further and examine the price action in more detail then I switch to a candle chart that contains far more information.

Digging deeper still

Sometimes though I want to look under the hood of the market rather than just the price action on its own – these are the market internals and that’s where data like this is so useful.

The table below shows the number of new period highs and new lows across more than 5000 listed US equities.

 

Barchart.com

 

US equity indices were barely changed at the close of play on Thursday 17/11/2022 which is when this data was collated. Yet we had 51% of listed US stocks making new 5-day lows 0on the session and 9.0% of US stocks making new one-month lows.

 

Barchart.com

 

 

That mismatch signals divergence, which is always interesting, that divergence suggests to me is that US markets don’t want to go down at the moment and that the largest US stocks, as defined by the S&P 100 index, or a large cohort of them, are mostly happy to sit above their longer-term moving averages And until that changes I expect the downside to be limited.

 

 

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