Sideways movement on the markets, disagreement among experts

Chart of the week

The chart shows the total inflows and outflows in equities (light blue line) and corporate bonds (dark blue line) since January 2020.

Why this is important

Since the beginning of the year, investors have been massively withdrawing funds from corporate bonds. The markets have also collapsed accordingly.

The picture is different for the equity markets. They have also lost a lot of value, but there have only been a few outflows. This is surprising at first glance. But it means that the big institutional investors with the big assets have not sold so far. They have increased their cash holdings by selling bonds but have not yet reinvested the money. If even a portion of this money flows into equities rather than back into bonds, this could give a strong boost to the equity markets.

Sideways movement on the markets, disagreement among experts

The market moved sideways last week with high fluctuations. It is rare that political analysts and economic experts disagree as much as they currently do.

On the one hand, the war in Ukraine is escalating. NATO officially names Russia as an enemy after years and Putin delivers nuclear-capable weapons to Belarus. On the other hand, some experts, such as Henry Kissinger, the former U.S. Secretary of State, believe that Putin will soon achieve his war aims and could offer a cease-fire in a few weeks.

Although the war continues unabated, oil prices are falling and wheat prices are virtually collapsing. The market is surprised to find that since the war began, there is more oil and wheat on the market than before the war. This shows once again how important it is to look at the numbers and not to be led by the panic in the press. We have also repeatedly warned here not to invest in oil or wheat.

The experts are also more divided than ever on the economic outlook. Some see the recession averted. Supply chains are coming back into balance and consumption is declining moderately. Others see union demands for higher wages as an upward inflationary spiral that has only just begun. The camp includes respected specialists like Ray Dalio and Jeremy Granthan. And then there is Michael Burry, the pessimist-in-chief, who sees the markets as even 50% lower. Michael Burry predicted the subprime crisis and got rich doing it. In the movie The Big-Short, actor Christian Bale plays his role. His argument is that central banks will not be able to reverse the large expansion of the money supply during the Covid crisis without causing a total collapse of the economy.

We do not share these extremely pessimistic analyses, but remain cautious about further economic developments. We still see an upward countermovement as the most likely development in the coming months. In addition to the fundamental reasons we have explained in the last market reports, there are also positive signals from technical analysis.

Technical market analysis confirms possible market recovery.

The aim of technical market analysis is to use suitable indicators to make trends in price development visible, which are difficult to see by eye, and thus lead to better investment decisions. It should also serve to make mass psychological behavioral patterns that are often repeated easily visible and to recognize them at an early stage. Here is a current example:

The chart shows the price development of the S&P 500, the broad market index in America since January 2020. The line at the bottom of the chart is the MACD index. The index shows the divergence between different moving averages. A detailed definition of the indicator can be found here. The indicator can be used as a trend following or trend changing indicator. Normally, the indicator runs the same as the price. That is, new highs in the price lead to new highs in the MACD (for example, at 1 and 2).

However, if there are divergences, this is usually a strong signal of a trend change. For example, the new high in the price of the S&P 500 from the beginning of the year at point 3 was not confirmed with a higher high in the MACD compared to point 2.

The same works in the other direction. So between point 4 and 5 the market fell but the MACD was able to rise. A strong countermovement followed.

Currently, a clear divergence is formed again between points 6 and 7. New lows in the price of the index are not confirmed by the MACD, which shows higher values. As after points 4 and 5, a countermovement is now more likely than a further price decline.

Many experts judge the informative value of technical analysis the same as reading coffee grounds. For the long-term orientation of client portfolios, we follow fundamental analysis. For short-term timing, however, technical analysis has often served us well. For example, at point 6, we only re-entered the market with small positions and only sharply reduced the cash amounts in the client portfolios at point 7.