As we go into Q4 for 2021, the US equities market looks to be shaping up to be a more volatile quarter as there looks to be potential for a sector rotation.
The main focus of investors for the past few weeks has been the ongoing fiscal situation happening in the US alongside data relating to monetary policy. As Democrats look to pass another fiscal stimulus package, investors continue to see this as a positive thing for the future outlook. Supply Chains have slowly come back into regulation following the pandemic which will allow economic data to establish a firm footing once again.
Although all of this sounds positive, two things to take note of going forward is that of VIX (image above) and the 10 Year US Treasury Yields (image below). With the bullish trending observed in the VIX gauge, we are taking note of potential fear within the market. Said fear is persuading investors to shift their money from risky stocks (Technology) to the “safety” of the US Dollar. In order to do this, they need to sell their stocks in order to acquire Dollars to purchase Treasury Bonds which in turn sends Treasury Yields higher. Higher Yields = Lower evaluations for stocks. And this is how the sector rotation from technology to cyclical stocks begins.
With risk events being the main focus going forward, we have a jam-packed week in terms of fundamentals with US Non-Farm Payrolls being the main thing on everyone’s radar. A lower outcome risks derailing the central bank’s lose policy unwinding. Take note of other events scheduled for this week as investors are still looking for any clues with regards to economic growth as well as employment growth.
Looking at NASDAQ technically, this week will be vital as we are currently trading at the 100 Day EMA (black line) which could potentially act as dynamic support going forward. We also have a liquidity zone stemming from Mid June/July around the $14 550 handle which is lining up to act as support as well. Should said levels be broken, NASDAQ’s next target will be the psychological level of $14 000. The 10 Year Treasury Yields look like they’re going to play a role in the future price action of NASDAQ and there are no signs of a proper bullish reversal just yet.
In terms of the Dow Jones, price is still technically bearish making a series of LLs and LHs over the course of the past few weeks. Should we see the sector rotation occur within the equities market, this could be the catalyst for a switch in the Dow’s trend. At the time of writing though, we are still bearish with downside targets aimed at the psychological level of $34 000. Only a break and closure above the 35k level would interest me in a potential shift in momentum to the upside.
As always traders, exercise healthy risk management and we hope you have a fantastic trading week ahead. For more updates like the one above, subscribe to our blog for instant updates to your mail or join our Telegram Trading Floor via our website at http://www.aspirefx.co.za.