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Week of Oct 14th: Further reversal of China stimulus trade; ECB cut and Silver running away.

Week of Oct 14th: Further reversal of China stimulus trade; ECB cut and Silver running away.

October 20, 2024 • Estimated Reading Time: 13 minutes

Hi,

Welcome to the second edition of the Quant (h)Edge weekly market dossier! This week I’ve included COT positioning, sector representatives, and S&P 500 sentiment, momentum and breadth.

Performance

Indices

Last week, the VIX dropped below 20 to close at 18.02. 20 is the long-term average VIX value so a value above 20 implies a high volatility environment while a value below 12 implies a low volatility environment. Therefore, 18.02 implies moderate volatility—things are calm.

Last week, we also saw the reversal of the China stimy trade. Hang Seng, Eurostoxx, Nikkei, and Euronext 100 were all down. Eurostoxx and Euronext recovered some after the ECB’s 25bp rate cut.

The S&P 500 was up 0.8% and made its 46th and 47th ATHs this year. Tech underperformed as the Nasdaq dropped 0.26% after a turbulent week.

Commodities

Precious metals did well in commodities. Silver rallied more than 6% on Friday, and Gold and Palladium were up by about 3%. Crude oil dropped about 6% due to the reversal of the China stimulus trade and hopes of de-escalating tension between Israel and Hamas. Soft commodities were down overall because of the reversal of the China stimulus trade.

Currencies

The Norwegian Krone performed poorly last week due to lower oil prices, a drop in inflation, and Norwegian yields topping out. It was particularly weak against the dollar and EURNOK gained in sympathy.

Other EUR crosses dropped due to the ECB rate cut and JPY crosses gained due to US yields.

Crypto

Bitcoin, Ethereum, Solana, Dogecoin, Litecoin and a few others were all up last week. Cardano, Avalanche, XRP, and TRON were down, among other altcoins. My view of crypto is that funds flow from the main coins to the altcoins when Bitcoin is going down and the reverse when it is going up. Bitcoin sentiment is bullish right now so it makes sense that some of the altcoins are underperforming while the main ones outperform.

Volatility

Indices

Looking at volatility among global equity indices, vol picked up in the Euronext, Hang Seng and ASX 200 this week compared to one-month vol, and decreased for all other indices and VIX.

Commodities

Silver, Oats, Corn, Cotton, Sugar and Soybean Oil all saw volatility increase. However, only Silver and Oat performed well last week.

Currencies

Only EURAUD and GBPAUD saw increases in volatility last week as AUD gained against both currencies. AUD gained against GBP due to a weaker inflation print, and against EUR due to ECB rate cuts.

Crypto

Bitcoin’s volatility decreased last week, but Ethereum and Solana’s volatility rose compared to the one-month vol.

Trading Ranges

Indices

Daily ranges have decreased across all global equity indices and the VIX.

Commodities

Corn, Cotton and OJ are the only commodities that had wider daily ranges last week.

Currencies

Similar to indices, all currencies had narrower daily ranges last week.

Crypto

Dogecoin, Bitcoin, and Litecoin are among the cryptocurrencies that saw an increase in their daily ranges last week.

FX Trading Ranges in Pips

This is just the same chart as the daily ranges for currencies but in pips. It is useful for adjusting stop losses. If you want to look at intraday ranges by hour for each currency, use the pdf below. It’s good for knowing which hours to trade.

Positioning Analysis

The following charts show the Net COT positioning on different assets. Net positioning is (Commercial longs - Commercial shorts) - (Noncommercial longs - Noncommercial shorts). It usually lags prices (since COT is reported one week later), but it can signal trends, and strong price reversals usually occur at the extremes. Take a look at Bitcoin’s net positioning for instance.

You can see the October rally coincides with an extreme net positioning. If you want to look at the commercials and noncommercial interests and positioning, download the pdf below. I’m not an expert on positioning but I’m reading some books about it and working on a comprehensive study that will be in the form of a web app.

Positioning is net long cocoa even though it has been underperforming.

Correlations

Indices and Commodities

Indices and Currencies

IPC Mexico has strong correlations with JPY crosses which are moved by US rates.

Commodities and Currencies

In theory, copper should be correlated to AUD but here the correlations are strongest inverse to the Euro perhaps due to economic growth concerns and also because of the reversal of the China stimy trade. Euro stands to benefit from a China stimulus since they export goods to China, and the Aussie stands to gain by selling copper to Europe.

Live Cattle and Nat gas have strong correlations with all but 4 currencies.

Silver and Gold have strong inverse correlations with EURAUD, EURCAD, EURGBP, and EURUSD.

S&P 500 Sentiment, Momentum and Breadth

Pct Above 50, 100, 200 DMAs

About 80% of S&P 500 constituents are above their 200-DMA, 58% are above their 100-DMA and 78% are above their 50-DMA.

Pct Outperforming Index

The percentage of stocks outperforming the index started at 41% and closed the week around the same figure.

Net Advance-Decline (%)

Looking at the number of constituents that advanced versus declined, on Monday, about 50% of constituents advanced and this figure decreased to 25% over the week despite the market making a new high.