The Factory Daily Letter

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The technical view

Uncertainty will continue as the narrative shifts from the threat of inflation to concerns of too much of a slowdown in growth

Powell's testimony to Congress last week seems to have shifted sentiment slightly as he said that the Fed's objective was not to create a recession, and moreover that future rate policy would depend on the upcoming economic numbers. In this context, could bad economic news actually be considered good news?

As concern across the investment community appeared to mature from inflation risk to that which policy designed to meet it might pose to the growth outlook (and the prospect of the US experiencing a deep recession) current Fed rate hike expectations have now been pared back on account of their being perceived as perhaps too aggressive (for, as Powell said, it is not the Fed’s intention to create a recession…) - and in turn a relaxation of these expectations has resulted in a slight improvement across the risk indicators.

Source: FactSet; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

So what might one expect coming off one of the worst first halves ever? Historically, H2 tends to be positive after a bad start.

As we approach the end of the first half of the year, there has been a slight improvement in sell-side rhetoric and some talk of how H2 could be better in terms of price action. And indeed, after one of the worst starts to the year the US equity market has ever experienced, we have seen some encouraging signs over the past week. However, the S&P500 index is still down 17.3% year to date, in the fifth worst start to the year in the index’s history.

The table below shows how the S&P500 has performed in the past coming off a poor H1 performance (the 20 worst). On average, the index has recorded a rise of 6.9%, with 70% of positive occurrences:

Source: FactSet; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

The long-term technical outlook remains challenging

From a technical point of view, the outlook for the S&P500 has deteriorated since it broke out of its uptrend channel to the downside, and we saw a ‘death cross’ as the 50-day moving average moved below the 200-day. However, in the shorter term, the US equity index has reached a key zone of support (between 3,500 and 3,670, as defined by the 200-week moving average and the 61.8% Fibonacci retracement of an Elliott bullish sequence that started in September 2020). Moreover, the RSI has formed a bullish divergence and the trend-following indicator the MACD (Moving Average Convergence Divergence) has crossed positively, suggesting that the negative momentum has been weakening and that a rebound from previously oversold territory could gain traction in the weeks to come. 

Source: FactSet; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

Short-term, a series of positive signals have been emerging

In the short term, the S&P500 has formed a bullish "island gap reversal", which is a bottom formation that occurs after a bearish sequence and is characterised by an initial downward gap, followed by a period of consolidation within a narrow range and ending with a bullish gap that isolates the period of consolidation and marks the start of an uptrend in prices.

From a sentiment point of view, this pattern could mean that after a battle between bears and bulls, the latter seem to have won. This is a step in the right direction but there is still a long way to go before the long-term technical outlook turns more favourable. The next short-term resistances hold at around 4,000 and 4,177 (the downward resistance line connecting highs since March and the prior high reached in the early part of June).

Source: FactSet; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

Russell 2000: a bullish divergence

The small-cap index has been trading within a downtrend channel since late 2021 and the price has fallen below a series of supports.

In the short term, the index fell below 1,700, which triggered a further decline to the lower band of the downtrend channel above 1,600 - a level at which the price formed a bullish Harami pattern (a candlestick pattern that indicates that a bearish trend may be reversing). And indeed since then the negative momentum has faded and the MACD has been forming a bullish divergence.

However, the price still faces a series of short-term moving averages that could put up resistance. The technical outlook remains difficult as long as the index remains below 1,900.

Source: FactSet; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

Uncertainty will persist at least until the next inflation figures

Short term, falling yields and commodities prices may fuel the relief rally, but in the long-term, diverging fortunes regarding the backdrop for risky assets are expected to persist.

If the Fed is too aggressive in its policy normalization then it risks creating “too much” recession risk. However, if it does nothing (and energy prices continue to rise) then stagflation fears could take hold and trigger more declines.

The current price action appears in many ways similar to that prior to the June CPI data when the idea of a Fed pause was gaining ground: of course, after that data release (which was stronger than expected) we saw a strong reversal in the trend and indexes fell to new lows.

As we approach the end of the semester we are seeing buying flows that seem to be supporting the indices. But in this current climate of high uncertainty, it is likely that long-term investors will remain on the sidelines in wait for a stronger fundamental catalyst (and the upcoming earnings season could provide more clarity in this regard). On the other hand, the oversold technical condition combined with the extremely pessimistic sentiment in our view continues to provide fertile ground for tactical trades.

Among the more speculative pockets of the market, it is interesting to note that Chinese internet stocks have continued to benefit from positive momentum. We expect such sectors to continue to offer tactical opportunities with significant potential over the next few weeks.

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

US Biotech and Chinese tech both benefit from positive technical configuration

Recently, the price of the Biotech ETF has fallen towards its previous low at around 62. However, unlike the broader index, this level has held and the price has formed a bullish double-bottom in the process.

Since then, the positive momentum has gained traction and the index has moved above an important resistance given by the 50-day SMA, brightening the technical outlook and paving the way for a move higher towards the long-term technical barrier at around 80.

A breakout of this level would further improve the outlook and may be seen as a major reversal in trend. 

Source: FactSet; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

The Chinese technology ETF continues to offer an attractive risk/reward ratio

The same bullish technical configuration is evident in Chinese technology. We identified the Krane Shares CSI China Internet ETF as among the more speculative pockets of the market, and it indeed illustrates how China’s technology sector has more recently been among the more resilient in terms of price action. 

The ETF’s price recently moved above the horizontal resistance line at 32.70. This has further brightened the technical outlook and could pave the way for a rise towards the next zone of technical resistance at around 40, a level at the confluence of the 200-day SMA and the Fibonacci retracement of the full bearish sequence dating back to February 2021.

Source: FactSet; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

The table below lists stocks in the most speculative sectors that still have upside potential (using the distance to consensus Bloomberg target price as a proxy) and are not overbought (RSI below 70).

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 27/6/2022. *Criteria are explained in the endnotes.

More technicals?

For our latest technical views on equity indices as well as currencies commodities and 10-year yields see our weekly publications linked below:

Technical views (indices)

Technical views (currencies, commodities and FI)

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