SP500 - a dead cat bounce or the start of a stronger recovery?

A synchronised "risk-on" move across multiple asset classes overnight, including the S&P500 and oil, based on optimism that Russia and Ukraine may find a diplomatic solution to end the bitter war and that OPEC+ will increase oil supply.

U Turn 2

The Ukraine President said his country is open to discussing Russia's demand for neutrality in return for security guarantees, although won't surrender a "single inch" of territory.

The stunning reversal lower in crude oil, from $125, to briefly below $104, came after news that the U.S. has made progress towards encouraging OPEC+ producers, including Iraq and the UAE, towards increasing supply.

While it would be nice to see the overnight moves in both markets hold for more than one session, there are questions about how sustainable the moves are.

Firstly, to the situation in Ukraine, Russian President Putin doesn't appear to be the type of fellow to launch a full-blown invasion and then retreat without gaining a meaningful addition to Russian territory. In this context, it's hard to see Putin agreeing to Ukraine's demands.

Secondly, members of OPEC+, including Nigeria, Angola and Malaysia, have consistently missed productions in recent months due to years of underinvestment. Aside from the UAE, it is doubtful whether there is enough spare OPEC+ capacity to fill the gap created by the loss of Russian oil imports.

Based on these considerations, the preference is to buy dips and remain underweight equities at a portfolio level, looking towards the 4000 level in the S&P500. Aware that if the global economy were to enter a war/energy induced recession, the average decline in the S&P500 over the past 11 recessions has been 26% vs the current ~11% decline. 

A more aggressive strategy will only be considered on regime change in Russia, combined with a break and close above downtrend resistance and the recent high at 4400/20.


SP500 Daily chart 10th of March

Source Tradingview. The figures stated areas of March 10th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation


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