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Market Technicals: Psychology of the Markets

Kotick Tick By Tick
CNBC.com
Kotick Tick By Tick

It’s time for our weekly market psychology update with Jordan Kotick, Global Head of Technical Strategy at Barclays Capital.

Kotick just got back from his travels in Eastern Europe.

Jordan tells us market stability is taking hold and economic confidence is slowly growing.

Q - Any regions specifically?

A - No, it is global in nature which is a good thing. In Europe, for example, which has lagged somewhat this year, the FTSE and DAX have formed a large base and are trying to break higher.

FTSE (100) top, DAX (bottom)
FTSE (100) top, DAX (bottom)

Q - Any implications for the U.S.?

A - We are biased towards always believing the message of interest rates.

It seems to us that European bonds are going to outperform US bonds (note the upward trending chart of the 10 year yield spread between the US and Germany).

While it can mean a great many things, our takeaway from this is the bond market is warning that US equities will outperform European equities.

And if the FTSE and DAX have upside, it is a good sign for US equities overall.

10 yr yield spread: US vs Germany
10 yr yield spread: US vs Germany

Q - There has been a lot of talk about volatility and its general inverse relationship to a higher stock market. Are you seeing anything there?

A - It is a fair point and while volatility and bullish equities tend not to go together, there are other things to watch aside from the VIX. Since the Dollar and JPY have been proxies for Risk since the crises began, lower volatility in FX is another way to gauge market fear or lack thereof. We have been looking for lower volatility in USDCHF 3 month (shown in chart) in particular and we do not think this is finished. Ultimately, taken in combination with other signals, we think this is another supportive chart for Risk.

USDCHF 3 month option volatility
USDCHF 3 month option volatility

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Questions? Comments? Write toinvestoragenda@cnbc.com

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