A trader's market

PORTFOLIO POINT: The market’s current volatility offers opportunities for traders, but investors should remain defensive.

The situation gets weirder by the day. Yesterday, rumours that the Chinese government would stimulate the economy drove stock futures, commodities and commodity stocks higher, only to be denied later in the evening.

All the data out of the US last night was weaker than expected: home values in 20 US cities, consumer confidence and Dallas Fed manufacturing activity. In the end, US stocks finished on their highs because Greece apparently isn’t leaving the euro, according to some poll.

But there was a disconnect with the move in equities; commodities didn’t buy into it, nor did currencies, while bonds refused to sell off.

Take a look at the Thomson Reuters/Jefferies CRB Commodity Index below; despite being very oversold, it finished on its lows.

Gold was off 25 bucks and remains stuck in the $US1525 to $US1600 range. Where it’s heading nobody knows.

Below is the chart of the US 10-year note, the bund future and the 10-year JGB (Japan) contract and all finished the session at or near their recent highs.

The euro, like the Australian dollar, tried to rally yesterday afternoon but finished near its lows of the session.

All European indices were up last night apart from Spain; it sank another 2.5%. According to Bloomberg: Spain will sink deeper into a recession in the second quarter, the Bank of Spain said, as data showed retail sales fell by a record annual rate in April.

Check out the chart of Spanish retail sales below. Sales collapsed 11.3% (YoY) and are back to levels not seen since the GFC. The Spanish stockmarket is down 30% from its 2012 high. Spain is in very deep trouble, and while the focus is on whether Greece will leave the euro or not, the same conversations are coming in regards to Spain.

I continue to believe that this rally in equity markets will come to an end and we will soon be breaking the 1290 level on the S&P500 and heading towards 1200.

Now that we have broken above 1330 on the S&P500 futures, 1340 to 1350 looks like it could be achieved. But nothing has changed: QE is months away, Europe is a catastrophic mess, China won’t save the world and the US is lumbering along at best.

The VIX, after breaking out of a head and shoulders bottom formation, is pulling back to support. If my theory of continued weakness in equity markets lies ahead, then I would expect this support to hold. For those who are not long volatility, buying this pull back is a great opportunity with a relatively tight stop.

All we can do now is wait for payrolls and this equity market rally to fizzle out. Traders should look to sell the rally and investors should remain defensive.

Tom Lovell is an independent strategist, trader and adviser with boutique advisory firm Pulse Markets and is the author of Lovellslandscape. His note is prepared for general information only. It does not have regard to a reader’s specific investment objectives, financial situation and/or his/her particular needs regarding the appropriateness of investing in any securities or investment strategies discussed or recommended herein. Readers should understand that statements regarding future returns may not be realised. So please do not act on any recommendations in this report without seeking independent advice.