Investment Idea

The Fed’s balance sheet guides the stock market

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13/01/2020 | 5 min read
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Trends continue to be in a rising mode for the stock market. The focus this week is largely on whether the United States and China should come to a trade agreement or not…and what such an agreement would cover. If the phase 1-agreement is limp, it will of course trigger negative reactions.

It was only a slight dip in the indices after the US-China trade negotiations heated up from China reacting to the US getting involved with the development in Hong Kong. The indices snapped up last Friday after a stronger-than-expected job report in the United States. ETrends continue to be in a rising mode for the stock market. The focus this week is largely on whether the United States and China should come to a trade agreement or not…and what such an agreement would cover. If the phase 1-agreement is limp, it will of course trigger negative reactions. But we expect an agreement that holds a sufficiently high level of abstraction to make both parties feel satisfied with the outcome without committing themselves to anything too much. President Trump have the upper hand in negotiations as it is obvious that the trade war is biting hard on China but not at all as much on the US economy.


Looking at the stock prices for the S&P 500 and for the Shanghai Stock Exchange (see graph above), it is evenly balanced right now. However, we suspect that the Chinese deliberately allocated money to the Shanghai Stock Exchange just to get this visualization. This is since Trump repeatedly emphasizes stock market development as a good parameter of his greatness…and sure, Trump has the forefront - from the US stock exchange's perspective:


The graph above is schematic but shows how the Fed and Trump have switched to raising stock Prices.

Also, it is the presidential election year in the United States, which is usually a strong year the stock market. After all, many people, including ourselves, wondered how long Trump could sit before he was deposed. Now he has succeeded in surviving all the battles and is seen as a favorite to win the next vote in November 2020. To secure this, however, he needs the stock exchange with him, which means that all the downs that will come during the year, he will actively try to counteract.

However, since September 16, 2019 the Fed has backed the stock market with recurring injections into the US capital market to stabilize the repo rate market, as we have shown schematically here.


Fed's purchase of bonds and other instruments in the market has built up the Fed's balance sheet, as shown above. Now it is not only we who follow these statistics meticulously, but large parts of the market share our interest. This is to the extent that during weeks when the Fed increases the balance sheet the stock exchanges tend to rise, but during weeks when it decreases, the stock exchanges tend to decline.


The picture above from ZeroHedge showa the relationship between the S&P 500 and Fed's net purchases. Last week was a negative week seen by the Fed…so be prepared for the market to take a temporary break in the upturn now.

S&P 500 did not manage to hold its new all-time-high set on Thursday last week. The short trend is still upwards sloping as the index is trading above its rising EMA9 as well as MA20:


Not only is the Fed’s reduction of its balance sheet a signal calling for a downwards movement. One should also note MACD which has generated a weak sell signal. On the downside, EMA9 and MA20 serves as first levels of support followed by the 3 200-level.

Tech heavy Nasdaq 100 index is at first glance showing no signs of considering a slowdown. The index is as S&P 500 trading safely above its rising EMA9 and MA20 and MACD is implying a strengthened Momentum:


A warning signal can however be found in the RSI-indicator. This in terms of the negative divergence between the index and the RSI during the last short upswing. EMA9 and MA20 serves as first level of support on the downside.

A gap to be closed in DAX

The German DAX index gaped nicely on Thursday. Friday’s trading however imply that it was not a “break away gap” and instead increase the probabilities for the gap to be closed. This especially if the general sentiment in the market will weaken.


Also, in the hourly graph below, one may see how MACD has generated a weak sell signal:


On the downside, the previous top from January 2nd serves as first level of support. This support level is followed by EMA9 which is hoovering right above Wednesday’s close.

OMXS30 has already lost its momentum

The Swedish OMXS30 did not have as good of a previous week as S&P 500, Nasdaq 100 and DAX. Instead OMXS30 was showing a loss in momentum already by the end of last week. This is visualized by the flattening/slightly falling EMA9 and MACD which has generated a week sell signal:


However, MA20 is still rising and serves as first level of support, followed by MA50. If this level breaks as well 1 709 is next.

Ericsson is still under pressure 

The Ericsson share is in its daily graph below pressured by its falling MA20 and MACD which is indicating a negative and continued weakened Momentum:


In the weekly graph below, one may also see how Ericsson did move upwards but the momentum faded relatively quickly. The share is dancing a dangerous dance with its weekly MA20:


With this said, should the stock market sentiment turn sour, there may be some nice downside in Ericsson. The first level of resistance can be found between the 80-level and Fib 23.6 at 79.3 in the daily graph.

Another gap to be closed…this time in Apple  

The Apple stock set yet another all-time-high after showing strong sales figures for its iPhone in China. Nevertheless, the share is well overbought in RSI-terms speaking. However, the share has been overbought for long periods and this is not a sell signal on its own. But Friday’s not overly exiting trading implies a reduced probability for Thursday’s gap to be a break away gap. Instead the doji created on Friday signals that the gap is likely to be closed.


Wednesday’s close serves as first level of support followed by a rising EMA9 and MA20.

Continued weakness in SEK ahead 

The Swedish SEK has weakened against the USD. Given a more risk off-sentiment in the market the upwards move in the pair, USD/SEK, is likely to continue:


However the pair is trading close to a resistance level at 9.51 made up by converging MA50 and Fib 61.8, that needs to be broken. The next level is found around 9.55 followed by Fib 50 at 9.60.

Bitcoin testing a ceiling in a falling trend

Vontobel is offering its clients Mini futures as well as Tracker certificates on cryptocurrencies. Bitcoins is likely to be the most well known of the various crypto currencies. It is famous for its high volatility, which traders tend to love even though the risk is high.

Below is the weekly graph for Bitcoin. As can be seen the crypto currency is trading in a falling trend channel. During last week however the currency made a strong move upwards closing above EMA9 but got stuck at resistance in the form of MA20 and the ceiling of the falling trend channel. The momentum is also improving, which can be seen in the MACD-histogram.


In the daily graph below, one may see how the cryptocurrency is trading above MA100 and the EMA9 and MA 20 is rising. MACD has also generated a buy signal:


So, the obvious question now is if a break upwards is coming. If so, the next level can be found around 9 395 followed by 11 356. On the downside, MA100 and EMA9 serves as first levels of support followed by MA20 and MA50.


This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.


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