Weekly reviews

FRS dilemma

So, the fourth quarter is fast approaching, which means that there are only 3 months left before summing up and evaluating the effectiveness of portfolio management in 2019 by Wall Street financial funds. It also means that losing trades will be closed and ruthlessly cut, non-profitable assets will be sold quickly, and what shows short-term profits will be aggressively bought. The fund management teams are doing this both to align and correct portfolio distortions and to achieve better statistical results by the end of the year, in the hope of generous Christmas bonuses and reinvestments at the beginning of the 2020. These last quarter - is the last chance to adjust the investment course of this year. What follows from this?

 

First of all, we should expect an increase in trading volumes and an increase in volatility in the financial markets.

 

Secondly, just at such a time, markets usually come to critical points of acceleration or reversal of current trends.

 

Thirdly, the market becomes extremely susceptible to any news or statements by officials and reacts nervously to any economic or political information.

 

And with such a disposition, let's try to imagine how the Fed should behave in the context of a protracted trade war with China, pressure from Trump, an explosive surge in oil prices after the attack on the world's largest refinery and dangerous situations around duties on European goods?

 

Will the Fed save the US stock market from a recurrence of the fall of 2018?

 

As we wrote in our review of June 07, 2019 “Fear rules capital”:

         

According to research by the FortFS analytical department, the risks of a new significant decline in stock markets are shifted by the end of summer 2019, and they should not be expected until the end of July - August.

 

Our forecasts were confirmed and on July 31, 2019, the fall of US stock indices began. For example, the Dow Jones index fell by more than 2100 points for the period July 31 - August 6. At the time of this writing, the Dow Jones had almost completely regained position and is now near a historic high. The same picture is with other American indices. In fact, the US stock market decides the most difficult dilemma - to continue growth and renew historical highs, or to fix profits, and go into a deep correction, waiting for better times and a more relaxed political and economic situation.

  And ecatly this position of financial markets also determines the Fed’s main dilemma - to make concessions to the political situation and reduce rates or follow exclusively economic parameters. In the latter case, a clearly overheated market may also follow exclusively economic logic and collapse as it happened last fall.

Futures have already pledged an average 70% probability of a September 18 rate cut by a quarter point. This in turn means that the Fed is a hostage to the situation and will not take responsibility for a tough policy now. Accordingly, on the one hand, the probability of a rate cut is really extremely high, but on the other hand, this decision is already fully embedded in current market prices and investors will wait for hints for further rate cuts until the end of 2019. It is the expectations of the Fed’s further rate dynamics that will determine whether the growth of indices will go on, or the markets will go into a deep correction.

 

According to our adaptive model of market behavior, the analytical department of the FortFS broker predicts the resumption of growth in US indices by the end of September - mid-October. Prior to this period, we expect a slight decline or continued lateral consolidation.

The precious metals market, in particular gold, is likely to continue to decline to the region of 1450-1475 in the next few weeks. However, the potential of resuming gold up trend is still on the table and we would not recommend agressive shorts in gold. 

Of course, this model will be relevant only if there is no information on the market that can change significantly current fundamental background.

Good luck in trading and stay tuned for our reviews!