Our Best Trade Ideas This Month

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By James Helliwell, Chief Investment Strategist

Hi everyone,

As this is the final Friday post before our Monthly Checklist Report is updated for August, I wanted to share some of the trades that our Trading Club members have been able to capitalise on in the past few weeks. I must admit that as we entered July I was a little concerned that we may be in for a more challenging period, despite the improvement seen generally amongst risk markets. With new cases of ‘the C-word’ surging at the time in the US, there was growing evidence that a second wave could threaten the progress made in the reopening of the global economy. However, my fallible human sentiments proved unwarranted as the markets broadly followed the direction of our various Checklists regardless!

I usually have to withhold some of these Checklists from this public blog out of respect to our paying members, but as it is month-end, I’ll provide full disclosure of what’s worked for us below.

First up, our Market Risk Checklist was positioned very positively with ‘full marks’ coming in to the month. This is rare as our ‘Sentiment Indicators’ are scored from a contrarian perspective. i.e. in this case, sentiment was increasingly pessimistic (a positive for us!) despite the other directional factors (monthly, short-term and leading indicators) all scoring positively. This set the tone for the month ahead, and suggested that risk assets should see inflows.

Next, we have our Business Cycle Checklist. This is always a keen interest of mine, but particularly so in recent months as we have seen a reversal negative, and since, positive again. The beginning of July saw a huge print in the ISM Manufacturing PMI tip the balance and turn our total positive, which confirmed the positive momentum we had observed in many of these indicators in recent weeks.

Looking to the chart, you can see how analysts have finally begun revising upwards their earnings estimates (grey line) in response to the improving economic outlook.

The improvement in business conditions is of course being driven by Central Bank liquidity, which remains unanimously ‘positive’ across the board and continues to inflate asset prices.

There has been a little bit of a downtick in the size of the Fed’s balance sheet, but with ‘MOAR’ on the horizon, it is unlikely to be the beginning any significant tapering!

Turning to equities, we could see further reasons to be bullish this month. With a score of +3, this sent a clear signal that the worst is now behind us and we should expect stocks to continue their rally. Valuation and earnings estimates were the only ‘negatives’ on here, and frankly I think it could be argued that historical valuations don’t reflect the ‘new normal’ risk free rate, and earnings forecasts are in fact improving (which may not have been captured in our scoring at the time, and has since transpired).

The past 4 months of hourly price data on this chart makes it all look like child’s play for longs, but of course this was coming from a very low base in March. Nonetheless, the market has continued to grind higher and has recorded a new post-crisis high again in July. When we updated our Checklist report the S&P 500 futures (continuous contract) were around 3000 and have since rallied by nearly 6% before giving back some gains yesterday.

There has been plenty of action in currencies, too. Whilst our Checklist was wrong sided on the US dollar, scores for the Euro, Yen and Sterling each played out as anticipated.

The pound became something of a range trade this month, despite weakness in the greenback, following a very strong period of momentum recently. Looking to the ‘overbought’ and ‘oversold’ extremes on the hourly RSI helped us to identify potential reversal points within the range.

Whilst a pretty boring looking chart, the same approach for the similarly ‘0 rated’ Yen also worked well for us. Trading the range has been the right call time and again over the past few months, as the Checklist score has remained neutral. Also, knowing when not to trade and focus on other markets can be as valuable as knowing when to trade on volatility.

The Euro has been much more interesting, and profitable, for directional trading with our Checklist this month. Although the stimulus catalyst certainly helped, the rally from 1.12 (identified as support in last month’s Trading Club video analysis) towards 1.16 has been great.

Yet the real action this month has been in gold. Going back to my opening comments explaining how I felt that there was a growing threat to the economic recovery, it seems as though the smart money has been positioning for ‘MOAR’ stimulus in gold as a traditional store of value. Here you can see our Checklist which remained positive again this month.

I did warn that despite the clear positive fundamentals supporting the rally, it did feel as though long gold was something of a consensus position. Nonetheless, the market has still seen new buyers in the past couple of weeks and has today touched $1900 per ounce (within touching distance of the record high of $1921 set in 2011).

This morning’s headline on Bloomberg sums it up…

Here’s what Mark Mobius actually said… (not that it would really matter, apart from the fact that he is confirming our independent view!)

Here is the weekly chart, for perspective, featuring a breakout candle to behold!

And finally, some monthly Fibonacci levels to truly behold (as I highlighted back in February). Next stop 2127, then 2461, eventually?

I hope you enjoyed this candid round up of the ideas that our Trading Club Checklists have helped us to identify in July. If you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to milliondollartraders.com and take your financial knowledge to the next level right away!

Have a great weekend,

James

Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information. For more information go to www.milliondollartraders.com

© Copyright 2020 Lex van Dam Financial Education. Further distribution prohibited.

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