It is sometimes difficult to remain objective when it comes to market analysis. The more we look at charts, the more bearish we become. This might not be the right outlook as it could just be various forms of biases that we are unable to overcome. The primary objective of any investor or trader is to remain objective and see things for what they are, not as what we would like for them to be. Thus, our currently bearish outlook must be taken with a pinch of salt as we could have this whole thing completely wrong. The market is unpredictable and we acknowledge that we are working with incomplete information and that we are at risk of being blinded by our own view of what is happening in the macro-environment.
The way we see it though is that economic data being reported is getting worse and worse and thus equities in general are not likely to see growth over the next 12 to 18 months. We do have a bullish view on the energy sector, in particular oil producers, on which we elaborated in this week’s issue of Finweek. Other than oil though, and maybe tech and ecommerce, we doubt that equities will perform well in the near future. Furthermore, over the last few weeks (and even during this weekend) we’ve seen countries (and states in the USA) extend their lockdown and social distancing measures in order to prevent the further spread of the coronavirus. This will likely translate into a delayed recovery in equity markets.
Another concerning piece of news that surfaced this weekend was that mine workers in South Africa have started testing positive for coronavirus. We’re not sure how this plays out, but we think that some of the miners might have to close. This could be bad for those individual mines, although likely very bullish for precious metals.
Until now we’ve been rather bullish on the Rand in general. We note now that our view might have to change given the news around potential mine closures due to coronavirus infections. We’re not sure how that will play out, but we would rather be careful and prepared for the worst in the event that things get a little wild. The chart below indicates a potential bullish consolidation on the USDZAR with a target around the R22.00 level. This seems like an outlandish call at the moment, but as we’ve seen, anything is possible. We would be happy to trade for the R22.00 target once we get a confirmed close above the R19.20 level. Alternatively, a confirmed close below R18.00 would signal Rand strength to us and we would enter a trade looking for R16.31 as a potential target.
The Top 40 Index (ALSI) seems to have found significant resistance around both the 126 day moving average and the 47700 zone. We note a shift in momentum towards the downside, bearish divergence, a break of the recent uptrend and a key reversal off a significant resistance level. A few days or downward pressure might be needed before we will be confident enough to enter into a medium-term short position here, although from what it looks like now we think that there is a very high probability that we see a second (likely less violent) move toward the lows.
Much like the ALSI above, the SPX has been showing early signs of weakness for a few weeks now. We’ve actually entered into a short position here already by means of put options with strikes over the next three months.
Given the news mentioned earlier about the coronavirus spreading among the mines in South Africa, we think it is likely that Gold breaks the consolidation in which it has been trading for some time now and makes a move higher. We also note that there are signs of building bullish momentum.
Platinum has also been in a rather lengthy consolidation pattern and will likely move higher on the same catalysts as Gold. Platinum is also showing early signs of building bullish momentum.
This seems to be a decent setup to us. We note that ABG is in a strong downtrend, has solid bearish momentum and has given a few momentum based sell signals recently. There is also a bearish break from a triangle formation and strong relative underperformance. The trend is your friend here we think.
We note relative underperformance and a few momentum based sell signals. Should the flat bottom triangle break, we think BVT could be a good short.
We flagged CFR as a short trade some time ago and note now that the trade is working. From the looks of things, there is much more downside to be had here. Although we want to warn that if the Rand really gets hurt in the coming week, it could negate some of the downward momentum on CFR. We also want to point out that CFR had released rather decent looking sales numbers last week. That said, we do not believe the longer-term trend will change to bullish just yet and thus we remain bearish on the stock. We just want to be careful about the potential impact a significantly weaker Rand could have on this stock.
Some time ago we pointed out bearish divergence and a possible short trade into the support zone. We note that the trade discussed then had worked out. Our question now is: will CLS come down more? We think that the probability of CLS testing support at R180.00 is rather high, although we would like to see a confirmed close below R218.00 before making any moves.
Coronation Fund Managers
The share price performance of asset managers are rather tightly correlated to the overall market performance (in general). We noted above that we see potential downside on both local and international equity markets and thus we think that CML’s earnings will be negatively impacted (as asset prices come down, so do asset value based earnings). Moreover, there is a rather good looking bearish setup on the stock. It’s given a number of momentum based sell signals, has broken both the recent uptrend and consolidation (to the downside) and is a relative underperformer.
Much like the others, DSY has broken its recent uptrend, triggered a sell based on momentum indicators and make a key reversal at a significant resistance level. Add to that a weaker Rand and we have a recipe to test the lows.
Another triangle break with multiple momentum sell signals and strong relative underperformance. FSR looks good for a short.
Like most banks at this stage, INP looks to be presenting a similar setup to the banks mentioned above.
We’ve gotten this one wrong in the past so we might get whipsawed here again, but it looks like MEI is making a nice flat bottom triangle. Although from a momentum perspective there is no clear view for us at this stage, we do note that it has rather recently become a relative underperformer. Right now there is not valid setup here for us, although a break lower from that triangle might be a short trigger.
A few months ago we felt crazy putting a R82.00 target price on SBK. Yet, here we are considering selling SBK short if we get a confirmed close below the R82.00 level.
The R90.00 target price on SHP is still incoming. A break below R100.00 could be another sell signal looking for new lows. The risk-reward is not what it once was, but the trend is strong and the world is falling apart. Staying short here is likely the right side of the market.
This is another one of those “surely it can’t go lower” setups. We note though that we’ve now seen seven out of seven signals for a short trade with a potential target around R35.00.
We pointed out the resistance zone a short while back and note now that SPP has been strongly rejected from that area. We think it likely to see the stock trade down to R140.00, perhaps even lower.
Regeneron Pharmaceuticals Inc
REGN is a pharmaceutical company in the running for a cure or vaccine for the coronavirus. While many companies in this space all claim to be closest to the cure, we will not really know which one finds it first until one of them have found it. Our view on this stock is therefore not “they have the wondercure”, but rather “there is massive bullish momentum”. Often we believe that we must buy low and sell high in order to be successful at this game, but it is often more profitable to buy stocks when they break for new highs. We note that there is a flat top triangle on REGN with relatively strong bullish momentum. This might be one of very few long positions that make sense in the current market environment.
*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.