Forex, Bonds, Stock Indices, Crypto, Technical Outlook, Edition #179 (27/01/2022)
US Fed signals interest rates set to rise in March ⚡ Worried about aggressive downside? Read on for the latest coverage of Fiat, Bonds, Stocks & Crypto in this free multi-market technical analysis 👇
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Rally in US Dollar strength leads to Bloodletting for Forex Majors
In the face of resurgent strength for the Greenback, major fiat currencies such as the Euro, Japanese Yen and British Pound-Stirling saw notably sharp downside reactions to gains in dollar dominance.
Furthermore, it appears that corporate earnings continue to disappoint shareholders.
While investors might expect businesses to experience periods of downturn in revenue from time to time, it is essential to note the timing that coincides with new signals from the Federal Reserve (FED) of an interest rate hike in March 2022.
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As the financial markets become acclimated to the FED's plan to fight inflation, it may be that the worst is yet to come—especially as an over-stimulated economy begins slowing down.
Nevertheless, value in growth stocks is generally determined based on their expected future cash flows...
Now, suppose for a moment that high inflation in conjunction with adjusted interest rates begins to corrode these expectations.
In that case, the theory suggests a flow-on effect to technology-dense stock indices. Furthermore, correlated markets are likely to deliver a tough pill to swallow for their respective participants.
Albeit, the tailwinds of ultra-cheap money in the form of fiscal stimulus spanning the past two years has been highly addictive for corporations. Consequently, a byproduct of this corporate debt-binging is the majority maintain relatively low or insufficient liquid cash holdings.
Households appear to have their funds pooled across stocks, bonds, and real estate at the present moment—as the 'Cash is King' adage proves true once more, deflation is fated to occur.
So, how does this translate to markets—as the FED remains seemingly oblivious to inflation spiralling out of control?
Share your opinion and leave a comment
The technical analysis appears to scream diversification.
Traders often joke that in a bull market, everyone can make money.
While such claims are questionable, it is valid to say that the idea in a bear market is not to lose money.
"Judge a fund manager by their worst years and not by their best" - Unknown.
As a result, fixed income securities become remarkably attractive in a world of ever-increasing uncertainty.
Logic might conclude that an asset capable of generating government-guaranteed yields during extreme market conditions is a welcome candidate for any retail, wholesale or institutionally managed portfolio.
Of course, some readers may exclusively trade cryptocurrencies and do not wish to distribute exposure across asset classes.
Qluster analysts illustrate an example of defensive portfolio diversification for 'crypto purists' below.
Generally speaking, a highly conservative strategy might be to yield-farm stable coins—e.g. $DAI, $USDC, etc.
More advanced defensive strategies come with far greater risk profiles to address a balanced educational perspective.
One example is short-sell hedging which aims to reduce the overall exposure of buy-side positions to market fluctuations. However, even experienced technicians must seriously consider the true complexity and high risks associated with hedging strategies.
Qluster Research suggests extreme caution. Those who consider hedging strategies should seek independent financial advice and understand the very high-risk nature of these strategies.
It may be time for other subscribers searching for opportunities across all financial markets to consider adopting a 'defensive' basket allocation.
Qluster analysts describe a defensive allocation of assets as providing consistent and reliable earnings, regardless of the overall market condition.
A simple way to gain a handle on defensive financial assets is to extrapolate its widely accepted meaning in the context of company stocks.
These investments are generally characterised by comparable long-term growth potential but a lower risk profile to aggressive or speculative assets—think a defensive stock like Procter & Gamble versus a speculative small-cap resources stock.
However, note that by shifting a defensive stance, the practitioner must usually trade-off the potential of a more significant reward for minimising volatility risks. The implication can be reduced gains in misjudged bull markets or falling into the trap of repeatedly mistiming executions.
In reviewing overall market activity for the last few years and paying close attention to the industries that outperformed the rest during historic crashes, Q notes that both the '08 GFC and '20 COVID crash are worth mentioning.
This proprietary analysis suggests that specific sectors held their gains and, in some instances, sectors were able to generate positive capital growth for shareholders.
These sectors include:
Fast Moving Consumer Goods (Grocery, Liquor Conglomerates)
Keep this assessment of the underlying market fundamentals front of mind. They exert a great deal of influence over the technical analysis update ahead.
As the markets fast approach their respective major support levels, the possibility of bearish reversals will skyrocket—remain vigilant for signs of falling demand, which is a likely technical precursor to price breaking down lower.
Adjusting the scope to include these considerations of aggressive bearish action is vital to ensure a grounded understanding of how the choppy fundamentals might eventually 'spill over' into price action.
Observe the latest technical analysis for Currency (Forex), Bond, Stock Indices and Crypto below...
US Dollar Currency Index, $DXY - Daily (D1)
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US Government Bond 10 Year Yield, US10Y - Daily (D1)
Dow Jones Industrial Average, DJI30 - Daily (D1)
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US Tech Nasdaq 100, NDX100 - Daily (D1)
Standard & Poor's 500 Index, SPI500 - Daily (D1)
Bitcoin vs. US Dollar, $BTC - Daily (D1)
US Dollar strength appears to move in lockstep with 10-year yields towards major resistance levels.
See $DXY and US10Y charts above.
For each instance, the case for bullish optimism remains strong as the dollar and bond yields make their moves on their respective .618 Fibonacci retracement levels.
In stark contrast, stock and cryptocurrency markets arrive at major support levels.
Perhaps, it may prove wise to pursue this line of inquiry and monitor this remarkably inverse relationship...?
See you again for the next update.
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