Chart of the week

Source: Twitter, SentimenTrader, @sentimentrader, 07.09.2022

The chart shows how much institutional investors are hedging their market positions as they expect markets to fall. The amount of hedging exceeds all of those in any crisis over the past 20 years.

Why this matters

The stock market goes up when more people buy stocks than sell, and it goes down when more sell than buy. When all investors are negative and have either sold or hedged their stocks, no one is selling. All it takes is a few purchases and the stock market goes up again. A crash only occurs when very many investors sell at the same time. A crash therefore currently seems very unlikely.The same connection is also confirmed by the greed/fear index. Investor sentiment was very negative the week before last and improved somewhat last week.

Source: Isabelnet, 08.09.2022

The chart shows the greed/fear index since 2006. At the same time, the index level of the American stock market (S&P 500) is shown. Whenever the values were low down in the green zone, there was a trend reversal. That is why a major slump seems rather unlikely to us. The current situation in the bond markets is very similar.

Source: Isabelnet, 10.09.2022

The chart shows the swap spread for two-year German government bonds. The swap spread is the premium of the swap rate on the risk-free yield of a government bond. In developed economies, the swap spread is thus a typical indicator of the prevailing market risk.Investors currently assess the risks as higher than in 2011 during the euro crisis or in 2008 during the financial market crisis. From our point of view, the fears are exaggerated.

Currently, however, it must be added that the war in Ukraine always has the potential to send further shock waves through the markets.

US Elections

With the current problems in Europe, it is almost forgotten that we are in a mid-term election year in the USA.

Source: Isabelnet, 08.09.2022

The chart shows the average performance of the U.S. stock market (S&P 500) in an election or midterm election year (blue line) and in a non-election year (black line).

The red vertical line shows the election date of that year.In an election year and also midterm election year, historically the return has always been low.

Usually there was a sharper rise at the end of September.Just a few months ago it was clear that the Republicans would win the Senate and the House of Representatives. It is the usual result in midterm elections that the party that does not have the president wins.

Turnaround in technology stocks

Technology stocks have been under pressure since last November, when interest rates rose across the board. Since the majority of many growth companies are financed with loans in order to grow quickly, interest rates are massively increasing costs. Companies that have never turned a profit after startup are hit especially hard.In recent weeks, many technology stocks have shown a remarkable recovery. The question is whether this recovery will continue.

Source: Isabelnet, 08.09.2022

The chart shows the relative out-performance of growth stocks versus the overall market (S&P 500). The out-performance has turned almost at the same point as in 2000 when the technology bubble burst (red line at the top of the chart). Using technical market analysis, which aims to identify repeating mass psychological behavior patterns in the price action, a shoulder-head-shoulder structure can be identified. This signal is one of the most reliable trend reversal signals in technical analysis.In addition to the fundamental tailwind for technology stocks described above, there are now the followers of technical analysis who will also bet on a decline in technology stocks.

However, technical analysis in particular is not an exact science. However, it helps to better estimate the probabilities for future price movements. It's like in a poker game, where each time a new card is put on the table, the players re-evaluate their probabilities. The player representing the growth stocks has the worse hand right now, but has not lost the game yet.

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