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Sentiment 03/2018

The complicity of war duties and  international tensions, made the stock market have another tumble, fueling doubts about the sustainability of the uptrend.

Certainly the joint analysis of the different assets suggests some worries that we try to verify using our usual methodology.

Let's start with the usual chart of the SP500 stock benchmark - Annex 1 with monthly scan.

The retracement of the index, although profound, has failed to weaken the trend that remains substantially in trend up by testing a "secondary" dynamic support. The real test will be keeping  2400 points, for now far, corresponding to the support of the main uptrend channel.

The correction has not been  sufficient, however, to cool the euphoria on the markets which, although downsized, remains far from the area of possible new purchases, as shown by the SENTIMENT indicator - annex 2, thus potentially exposed to new increases in volatility.

So far  technical analysis does not register significant alarms; but from reading other macro and inter-market indicator signals we cannot underestimated  the negative implications that could happen if  confirmed.

First of all the TED SPREAD - Annex 3.

Its function is to measure the tension on the liquidity of markets through the ratio between short-term rates and LIBOR. Historically the index has moved around the average value of 0.46. Higher readings, understood as a decrease of liquidity, lead to tension on the stock markets as is easily visible from the attached graph. The trigger line is set at 0.60 and up to this value the market has a normal trend. The exceeding of this value has always brought with it very negative consequences, as happened in the years 2000-2001 and 2007-2008.

Let us now examine the PROBABILITY RECESSION indicator - annex 4. As is well known, the spread between the long and medium-term rates builds the Yield Curve and provides precise indications on the state of the economies. The graph represents  the current US rate situation in which the critical threshold of spread 1 has been knocked down.  Just to underline the importance of this value, every time it fell below 1, recession occurred after months or a maximum 2 years.

We conclude with our lighthouse on markets  M.Q. IDX - Annex 5. We have  posted many times the chart underlining its role of "recognition" of the turning points of the stock markets. Also in this case the first warning signals are evident, even if not all the conditions that identify the change of trend have been realized.

The overall analysis of the data highlights a market in distribution phase in which we could see a prolonged lateral / bearish movement that will lead us to a recession  phase. Also the macro data released recently, incorporated moreover in our MQ Idx, signal slowdowns in the US economy.

We believe the stock market is still interesting, at least on anticyclical stocks, while we await confirmation of the turning point in the cycle from our MQ Idx to declare the positive phase of the markets end.

In any case, we suggest gradual positioning on US government bonds, both 10 and 30 years, that offer an excellent return and a high degree rating.

Giorgio Giovannoni