Make or break? S&P 500 is entering its resistance zone

We are trading hope of a fast end of the lockdown and a strong economic recovery. Before the weekend, the European union has announced another EUR 1.5 trillion of rescue program. The northern part is still reluctant against corona bonds, but this help program is unprecedented. The Fed has discussed considering a yield curve control (YCC) but has so far refused to go ahead. But as negative US government bond yields are getting a real threat, they might soon discuss this topic again. Meanwhile, the risk of a melt up in the equity market has risen. Both the S&P 500 and the Nasdaq indices are entering resistance zones, but we cannot rule out that the enthusiasm will let us just pass this zone.

Fig. 1: S&P 500 is entering its resistance zone (2’850 – 2’950)

Fig. 2: Very similar technical picture in the Nasdaq

We believe however, that the UK and especially the US are too fast in loosening their lockdown measurements.

Fig. 3: The end of the lockdown?

This has consequences for the further economic development.

Three main scenarios are to be considered:

• A fast V-shape recovery starting in H2
• Long lasting recession followed by a financial crisis
• Overheating and inflation pressure

If we can avoid a stop and go strategy, i.e. the 2nd wave will be resisted, the outcome will be V- or U-shaped. However, a combination of the 1st and the 3rd scenarios is more probable. For both risky assets will perform well. Beside US equities, gold and gold mining shares we would argue that US high yields (we prefer the BB area) offer the best risk return characteristic due to the Fed and US government safety net (fiscal and monetary stimulus).

Fig 4: Global High Yield spreads are at similar levels, but US HY offer best policy support

Fig. 5: This new rally (like the one before) is missed out by most investors

Fig 6: The Bull Bear Indicator at its lowest level although we have seen rising prices

Therefore, in short-term watch out what happens with the actual resistance level. Mid-term – don’t fight the Fed. US corporates and US equities do offer upside potential. From a risk return angle, we prefer US high yields over equities. Recent developments in China, i.e. the PBoC has announced today more stimulus and the industry is at almost 100% of its pre-crisis level, confirm us to stick to the Chinese corporate bonds.

Gold as hedge or participation in a leverage way gold mining stocks cloud as well be a reasonable addition to clients’ portfolios.

Published: 27/04/20 by Blackfort CIO Dr. Andreas Bickel

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