Weekly game plan 15 March 2020

We’re not sure where to start. We have to say though that last week was mental! Wow! Neither us, nor those older, wiser and more experienced than us – that we have the privilege of speaking too and learning from – have ever seen anything like what has been happening over the last three weeks before. These truly are extraordinary times. Rattling off the statistics though is not something we want to do… the internet is full of posts, blogs and articles citing all the various statistics in the most dramatic way possible. Instead we want to try and gather our thoughts and come up with some sort of a trading plan for the week ahead.

That plan has to start with acknowledging that the world might have gone full tilt here. The Fear & Greed Index hit 1 last week, as in, maximum fear. The CBOE Volatility Index hit highs last seen in 1987 and 2008 with the highest print at 77.6. This was real, unfiltered panic. The kind of panic that just indiscriminately sells anything and everything. The question now is; is it over? Honestly, we can’t tell. The sheer speed at which all this happened is alarming and uncertainty that it’s left market participants with is paralysing. So is it over? Is it safe to start buying and getting back to business as usual? We just don’t know to be honest. Even internally, our strategists have not managed to reach consensus around what the safest and highest probability plays in the market would be in the coming week.

The one thing that we can agree on is that the current market conditions are creating interesting long-term opportunities for investors who are less concerned about the short-term fluctuations and more focused on valuations. Our game plan this week will therefore be broken into two pieces; a shorter-term outlook and a longer-term outlook.

Short-term views

In the short-term we think that things are still going to be very volatile. The news flow over the weekend makes us believe that coming out of the blocks on Monday, markets are going to feel some pain. It is known that bear market rallies are some of the most violent rallies in recorded history, and thus Friday stands as an example. With all the news around the COVID-19 virus, airline bailouts, business closures, border closures and just general mayhem, we expect markets to start the week on the back foot. How the week ends, we can’t tell.

S&P500

Last week we made a rather alarming call with downside targets at 2600 on the SPX. These targets were hit with ease and the SPX traded to below 2500. We now note that we think it is probable that the SPX tests the lows printed in 2018 at around 2317. We will be watching very carefully to see how the SPX reacts when (and if) it interacts with that 2317 level. If that level holds and we see signs of shifting momentum, it could offer a really high risk-reward long trade opportunity. That said, a break below that level (which could take a few weeks) would likely indicate that the downside is not over. The entire world seems to be headed for lockdown, so the long-term economic impact of COVID-19 cannot be ignored. Thus a move below 2317 would not entirely surprise us.

BHP Billiton

Even though this is the shorter-term portion of our game plan, we are using a weekly chart to help us make sense of what is happening. We note here that BHP has broken out of a large bear flag formation on the weekly chart. Unfortunately half the move to the anticipated first target has already taken place. That said, the overall trend is firmly down here and we you consider this not just as a breakout trade, but rather a trend continuation trade, we note that the downside targets are somewhat lower than what is indicated on the chart below. For the coming week though, provided that global sentiment and news flow does not materially improve, shorting into the rallies could be a prudent course of action, albeit high risk.

Anglo American PLC

Once again we are considering short-term trading opportunities that we are identifying on weekly charts. AGL is a bit of a ‘history repeating itself’ play, if you will. We note that on the weekly chart we have evidence of a similar setup to 2008/9. The current and historic setups both have right-angled broadening triangle formations, as well as bearish divergence between the MACD oscillator and Price. Using a Fibonacci projection, we note that in 2008/9 the bearish breakout from the pattern resulted in a move that terminated between the -0.168 and -1 Fibonacci levels. Should we see a similar move this time, that would set a price target zone between R170 and R110. It may take a few weeks for this setup to play out, but the risk-reward on offer is attractive to us.

USDZAR

The USDAR might be a little tricky in the week to come. Much depends on how the week turns out and how much of the kitchen the U.S. Federal Reserve Bank are willing to throw at markets. Considering the sink has already flown across the room, we’re not sure how much more there is to throw. That said, anything is possible. We would imagine that the USDZAR moves to test the highs at R17 in the scenario that ‘risk-off’ remains the dominant theme. Else a retest of the large triangle breakout at R15.70 would likely provide a long entry. Overall we are bearish on the Rand (thus bullish on this chart) as we believe that regardless of external catalysts, South Africa is facing some headwinds. A retest of the formation breakout will be welcomed, although we are not sure that this is the most probable outcome. At least not in the week ahead.

Longer-term views

It is during times like these that, even though things might look scary, we must put our long-term hats on and think carefully about the opportunities that the surrounding hysteria and panic are creating. We see some attractive entry points into stocks that we would like to hold for the very long-term. Please note that we will not go into too much detail here in terms of our reasoning for each of these stocks. We will simply note that we like the valuations of these business at current levels and think that even though the probability of dividends being cut in the short-term is rather high, over the next few decades these businesses will perform well.

Telkom

TKG is not a business we think will disappear. It owns 97% of all the fibre infrastructure in South Africa and is the least vulnerable to legislated data price reductions. We note that the recent restructuring was negatively received by the market, however we think that it will prove to play into TKGs favour over time. We think that the share in attractive here for long-term investors.

Growthpoint

GRT offers an entry point into what we feel is the broadest representation of the South African property market. We think that once the dust settles and the fear dissipates, GRT will do well to track an recovery in the South African property market over the longer-term.

Sasol

Odds are that we will see a right issue here. We think that if that rights issue comes, it will be a great entry point into SOL for the long-term.

Double your savings

We would also like to strongly suggest that investors who make monthly contributions into equity focused savings products such as retirement annuities, unit trusts and ETF portfolios, double their monthly contributions over the next 12 to 18 months. Historically, bear markets last around 12 to 18 months on average and thus if investors use them as an opportunity to buy (preferably index tracking investment products), bear markets can be used as powerful tools in wealth creation. Using an ETF to explain the reasoning; each month the investor saves during a bear market, index tracking ETF prices are likely coming down. Thus, as the bear market rages on, more and more ETFs (or units) are being bought for the same amount of money each month, bringing the average price of the total sum of ETFs down. When markets are coming down, and monthly purchases are doubled, the impact this has on the average purchase price of the total ETF holding is amplified as now the larger purchase values at lower prices brings the average price down far more quickly. We’ve seen that over time, markets recover. They have been doing this for hundreds of years and very likely will keep doing this for hundreds of years to come. Therefore we believe that a bear market is a huge opportunity for us to accumulate wealth. So our advice is to not panic, but rather think carefully on where you can cut back on your budget and start investing like crazy!

*Please note that these trade ideas form part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.

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