What is happening to US Indices ?
The US has the most traded Stock exchanges in the world with both the New York Stock Exchange and the NASDAQ taking first and second place. At times, the two indices are five times larger than the next most traded, the Japan Exchange Group. The market value of the two stock exchanges is more than $40billion and tends to increase year on year. Stock indices are simply a collection of stocks that moves according to the stocks held within it. For example, the SNP500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. The NASDAQ is also an index, but includes 100 stocks that are mainly technology based.
So, what is currently happening to the stock market in the US and more specifically, tradable indices such as the US500 (SNP500) and the USTEC (NASDAQ)?
After the stock market crash in February 2020, the index market has actually been performing extremely well in general. The price fully corrected within less than three months and continued to increase and renew price highs month on month. If we look at the price prior to the stock market crash compared to the price highs this month, we can see the USTEC has increased by 42.30%, which is substantial within such a short period of time, and similar figures can be seen on other US based Indices.
However, over the past two weeks we have actually seen all major US indices decline by approximately 5.11% and at times, even as much as 8.50%. So, the question a lot of traders are now asking is, what is happening to the price of the instruments after having such a successful second half of the year (2020)?
Stock indices began to actively reverse downwards against an increase in US bond yields and an outflow of private investors. The instrument has been successfully ignoring a slight increase in the yield on Treasury bonds. However, larger increases, such as the rise in 10-year bonds to 1.36%, triggered a decline in most stocks. Analysts earlier this week noted that an increase in the indicator to the area of 1.5% may lead to a fall in stock indices within 5–7%, but the days after saw indices decline by higher figures at times.
Another confirmation of the outflow of investors from the indices is the weekly report of the Commodity Futures Trading Commission. It reflected the strongest reduction in net speculative positions in the index since September 2020, reaching 79.9K. This again possibly changed sentiment towards risk based assets such as stocks and indices, as has the end of the quarterly profits report season.
Another possibility besides growth in the Bond market, change in risk sentiment etc, is traders looking at the possibilities of the assets being overpriced. This possibility has been voiced by many analysts though the price had not at any point found resistance thereafter, not until the latest movement over the last couple of weeks. The issue is that it can be difficult to determine whether an asset is indeed overpriced or not, as it also can be a matter of perspective.
The good news is that the declines moderated after the Central Bank’s Chairman said in congressional testimony that inflation remains soft, quelling fears among some investors that the late February rise in interest rates might force an acceleration of central bank rate increase plans. Instead, Mr. Powell signaled that rates will remain low as the Federal Reserve seeks to bolster job growth.
However, this does not necessarily mean the US Dollar will not rise in the coming weeks, or months, the question remains as to whether sentiments will change as the stocks become more expensive to foreign buyers after a rising Dollar creates unattractive exchange rates. Even local traders may look at alternative investments as the Dollar stabilises. Currently, this is purely speculative as the Dollar remains low and is not currently showing signs of improvement, however, traders should remember the correlation between the stock market and the US Dollar going forward.
Without-a-doubt, the main importance is of course the price movement itself. We can clearly see the asset’s downward trend after the breakdown of the support level which ranged between $3884 and $3894. The trend had clear wave patterns indicating lower swing highs and swing lows clearly giving traders the downward trend impression. However, the picture became more complicated as the price retraced back upwards last night. Currently, the movement is still a retracement, as it has not continued to form a trend and traders can continue to use breakout points to attempt to predetermine how the price movement may move going forward.
Disclaimer: This material is considered a marketing communication and does not contain, and should not be construed as containing investing advice or a recommendation, or an offer of or solicitation for any transactions in financial instruments or a guarantee or a prediction of future performance. Past performance is not a guarantee of or prediction of future performance.