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Sentiment 01/2018

The usual report is coincident  with a crucial moment in the markets and investment assets.

After the month of January, closed with a new benchmark index maximum, a corrective phase is started , still under development, which led to a 10% loss of the SP500; for the Italian index this coincided with a retracement that has absorbed all the gains from start year.

If this were not enough, two other factors were added to this turbulent phase: the dispute between the US and EU on the "correct" evaluation of the € / USD cross, which sent the exchange rate on the roller coaster, and the flight from bonds high risk.

To explain the reasons for this correction it was written and said about the risk of an aggressive increase rates by  FED in the face of a rise  inflation  beyond target. We know, however, that inflation is not yet a risk element in the US: the level of income growth is still very low and would not justify the risk  inflation. In addition the rate policy, already declared by Yellen, forecasted a gradual rise in rates,  remained vigilant on economy growth.

So why this sudden reversal? We have always declared the unsustainability of such rapid growth of  indexes, without significant corrections. It simply happened. For such a sudden plunge certainly contributed the automatic trading systems and the shots of the different stop loss, positioned to protect the portfolios.

To understand where this correction can come, let's start from the analysis of the SP500’s monthly chart  (Annex 1), taking up what was written in the December report to identify the key points of this phase.

The first level of support we had identified was placed at 2567 pts. This level has been  reached, recording a monthly minimum of 2532, and then rebounding and closing the month still in the area of ??the new uptrend channel  with target 3200 pts. To consider  still in force the uptrend, the index must not fall below 2360 pts, corresponding to long-term dynamic support.

Let's now analyze three indicators that we periodically published with a warning: they are indicators built on a monthly basis and therefore refer to the end of January:

- Sentiment indicator (All.2) - the euphoria on the markets has significantly reduced, bringing the indicator back to neutrality  area , but still far from the area of ??fear that would provide a good signal to return to the markets;

- Global stock market indicator (All.3) - measures the monthly variations of the world's main financial index. The indicator is still positively inclined and far, for the moment, from signs of weakness;

- US macro indicator (All.4) - the indicator has signed the market turning points over time. In January appear the first sign of weakness with the M.Q. index who turned down, but no break up the 12-period moving average and this one did not perforate the average to 21 period.

We reported last month the opportunity offered by 10yr US Treasury Bond for a low risk return. Currently the yield moves around 2.90% but there is still space up to 3%.

With the achievement of the 3% target we would have a risk-off signal.

Giorgio Giovannoni