Hello traders, like usual I would like to share my personal weekly sentiment analysis to get a feel of the risk appetite in the market. I hope you can find this forum insightful.
SPX
Like usual, starting with the stock market, the S&P 500 would be the go-to benchmark when it comes to the stock market. The stock market previously surged back after making a bounce of the trendline from October 2022, making the third touch point that validated the trendline. Also, the third trendline bounce was perfectly aligned with the 50%-61.8% Fibonacci level and the 200-day moving average, which adds another layer of confluence to attract buyers into the market.
After the bounce of the trendline, price made a follow-through bull bar, which shows that buyers are in for a “risk-on” environment and want price higher. Buyers could try to target the recent swing high at 4184 as their default target, but expect more in the hope of a long-term bull trend.
BOND YIELDS
Looking at the US 10-year bond yields, due to their nature of negative correlation to the stock market, the US 10-year yields reflect investor confidence in risky assets as the yield drops by -0.106% after breaking above the 4% mark and now quickly returning below the 4% mark.
As we look at the technical aspect of bond yields, there is a lack of multiple confluence like we find in the SPX. Further confirmation of an increasing appetite for risk can be established if bond yields break below last year’s December high, which could act as a support level. But if we can get yields to hold above 3.89% and find bullishness, we could then establish a bearish outlook on risky assets.
The US 2-year yields also show consistency with the US 10-year yields, as the 2-year yields show signs of bullish pressure to weaken and the yields are starting to go lower. On the previous trading session, the 2-year yield dropped by -0.32%. From the technical aspect, this is also consistent with the 10-year yields, where there is a lack of confluence to confirm further bearishness, but a well-timed break and establishment below the 4.734% level would be a good indication of raising risk-asset appetite, while a continuation to the upside would indicate the opposite.
However, the yield curve of the US 10-year yield to the 2-year yield is still inverted, which still warns investors of a potential recession in the future. The US 10-year yields to the 3-month yields are also showing an inverted bond yield curve, which gives investors warning signs of a potential recession in the future. The yields also seem to be making a break and retest pattern, which shows that there is potential for the yield curve to remain heading downward and that the bearish trend is still intact.
VIX
The VIX, which is also known as the fear index of the market, is currently falling back below the 20 level with strong momentum. The VIX would show us that risk appetite is growing in the market and signal a “risk-on” environment that is good for risk assets, especially the stock market. A further break of the 17 support level would then signal a strong appetite for risk in risk-assets.
THE WEEK AHEAD
This week will be busy and volatile in the markets due to the release of multiple important economic data points. The February NFP Jobs report, JOLTs job postings, foreign trade figures, and speeches by several Fed officials will all be in the spotlight. We also have China’s inflation and trade figures, as well as GDP updates from the UK, Europe, and Japan. This week’s interest rate decisions will also be made by central banks in Canada, Australia, and Japan.
source: tradingeconomics
Conclusion
The market is overall showing signs of growing risk appetite, which is reflected across the stock market, bond yields, and VIX. The growing appetite for risk can be beneficial for risky assets such as equities, but also for risky currency pairs like the Euro, Pound, and Aussie. However, the warning signal of a potential recession from the bond yield curve is still present, which can make investors a bit more cautious. This week, there will be numerous releases of economic data that could result in a volatile market and have the potential to set the tone of the market for the month.