Weekly Wrap

Weekly WrapMarket Update

Calendar Icon   Friday, 5th March 2021

This week the XJO chart has a Fibonacci retracement indicator starting at the low in March last year, to the high set at 6917 points on 17th February this year. If the rally is complete for the XJO, the Fibonacci levels can provide a useful guide to determine levels of support.

When a market corrects, it is normal for the share price or index in this case, to retrace 38% of the previous movement in an initial decline. Therefore, we could expect support for the XJO surrounding the 6000 point mark.

Before we get to that level, the index would have to break through 6407 which the XJO reached on 1st February. That sell-off was shrugged aside as the XJO made a new recovery high at 6917.

Caution appears to be the wisest approach at this stage and the use of hedging tools, such as Index options or the BBOZ.AXW instrument may be prudent.

XJO Chart

Bond Markets register a warning

The Bond market has been warning investors that all is not well, especially in the American economy. Since last August, the US 10 year Treasury has rallied from an historic low of 0.50%, to a close on Thursday at 1.57%.

Bond markets have a way of leading markets. The fact that the rally started back in August means the traditional economists view that rising rates happen because of an improved economy are false. The American economy was not on the improve in August last year, yet yields started rising.

Below is a chart that shows volatility across shares, bonds and FX. Whilst shares and FX are relatively stable, the volatility of the bond market has rocketed in the past few weeks.

Last week, the bond auction markets were described as “terrible” by one analyst, with the amount of offers received for the auctions being the lowest on record.

March 2021 is supposed to be the biggest month for issuance of Treasury debt on record. However, with falling demand, the scene is set for some price shocks.

There has been a long held belief that the market would absorb any amount of debt issues. However, the cracks are starting to show. Share markets are always the worst performer when bond yields move rapidly higher.

Volatility Z-Score
BBOZ Risk Mitigation

Hedge with BBOZ

If share markets are about to enter a corrective phase, a simple way to employ some protection is to buy BBOZ. This is a bear fund that is leveraged to move approximately 2.5 times what the XJO index does.

This means that if the market falls 5%, the value of the BBOZ price will increase 12.5%. Note: This leverage also works the other way so that a rise in the XJO will see BBOZ fall by 2.5 times.

This means that the use of BBOZ should be carefully managed. To find out more about BBOZ please click here.

BBOZ Chart