U.S. Traders Remain Calm While Europe Retreats

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Two weeks ago, we pointed out the unusual correlation between the U.S. dollar, gold and stocks. That situation hasn’t changed in the subsequent two weeks, and it has a strong historical probability of leading short-term, bearish corrections. Since that time, major U.S. indices such as the S&P 500 have continued to rally, which is a little unexpected but not unprecedented.

However, bullishness over the last two weeks hasn’t been uniform across all major markets, which could help us refine our outlook.

For example, investors drove short-term German bond yields to record lows this week due to worries about a French redenomination and exit from the EU, which look slightly more likely as Marine Le Pen’s presidential campaign gains steam.

What This Means for Investors

For non-bond traders, very low yields on short-term bonds mean that investors are seeking safe-haven investments in Europe.

As you can see in the chart below, the French CAC40 index was doing well until being rejected at long-term resistance last week. While this resistance bounce is far from a bear market, it nonetheless illustrates an asymmetric risk appetite for global stocks. German and U.K. stock indices are in a similar position as investors favor U.S. assets.

U.S. Traders Remain Calm While Europe Retreats

Source: TradingView.com

At this point, the question is whether investors should adjust their bullish outlook or maintain the current view. We believe the answer is probably in the middle. European stocks (like gold, bonds and the dollar) are signaling a cautious outlook that is somewhat out of step with the amazing gains in the S&P 500.

While these aren’t very precise “timing” indicators, it should be viewed as a signal that if the market declines, such a decline would likely be very sharp.

The Bottom Line on the S&P 500

A bull market is still a bull market, so we continue to maintain a bias to the upside. However, the potential for a sharp correction presents interesting opportunities for a few bearish trades, if we can be patient.

Over the next few weeks, we expect that political news (in both the U.S. and Europe) will continue to be the X-factor that could spoil the current rally and cause a short-term correction. That will be difficult to time very precisely, but the opportunities should be exciting.

InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/us-traders-remain-calm-europe-retreats/.

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