And just like that, we had our little sell off and the market bounced right back to all time highs. The BTFD crowd win again! It is becoming harder and harder to remain wildly bullish though. Yes, there are some great looking setups out there, and yes, South Africa (and other emerging markets) seem to be very attractive ‘underperformers’ that seemingly offer a huge amount of value. Generally the thinking is that we are entering into a new global growth phase and that the underperforming emerging markets ‘should’ catch up to developed markets. That is an enticing narrative and one probably worth positioning for. However, there are some warning signs that are not going away and are difficult to ignore.
The one that has our attention at the moment is the risk of rising interest rates in developed markets. The FOMC will be announcing an interest rate decision during the upcoming week and while it is generally not expected for them to raise rates at this meeting, it is becoming more difficult for them to justify ’emergency stimulus’ when the emergency is basically over. U.S. business sentiment is basically the highest it’s been in 16 years, while inflation (transitory or not) is the highest it’s been over the same period. Sure, there are still 9.3m odd people without a job in the U.S., but even that is significantly lower than it was a year ago, when the actual emergency was happening. Right now, the U.S. economy is strong and that is likely to be the rhetoric we hear from Jerome Powell later in the week. Of course, followed by some justification for continuing to use ’emergency tools’ to support the economy. This is a song and dance that we don’t think can keep going too much longer. Perhaps next month at the Jackson Hole symposium do we start hearing the clear warning shots of interest rate hikes on the horizon?
Further to the inevitability of interest rate hikes, market breadth has been steadily deteriorating over the last two or so months. It’s not wise to be bearish in the long-term… but perhaps it is wise to start prioritising value over growth?
Offshore trade ideas
S&P 500 (SPY)
A quick, fast and dirty sell-off to the 50 day moving average… and bounce for the heavens! Technically a breakaway gap to all time highs is rather (extremely) bullish, although there has been a lot of ‘new lockdowns on higher cases fear’ in the media over the weekend. This should not be ignored. With new Covid-19 cases in many places spiking above the 12 month averages, that fear could well see the SPY repeat the trading action of the 10th of May (as opposed to the 5th of April) when last we saw the daily chart in a similar configuration.
We’d thought that we might see QQQ trade down to our marked support level, but the BTFD crowd was having none of it.
Russell 2000 (IWM)
IWM is still the canary in the coal mine to us. If this rectangle turns out to be a distribution pattern and IWM breaks lower from this range, that could be the signal that a deeper pullback is coming to the larger cap indices. For now there is no actual trade here for us. We do think that this is a key index to watch. Much of the reason market breadth is deteriorating is because this index can’t catch a bid. It is important this it holds the 200 day moving average (and not break lower from this range) if the bulls want to stay in control.
U.S. Dollar index (DXY)
Our eyes are still firmly glued to the DXY. Above that $93 to $93.50 zone and things might get a whole lot more exciting. A stronger USD in current market conditions will likely signal a flight to safety and thus put pressure on equity markets and commodity prices.
Perhaps the best way to illustrate the impact of the DXY rising. The higher the DXY goes, the higher the probability that the ZAR pops out of this Historic large range and makes a run for R16.16 and beyond.
Brent Crude Oil
We’ve been oil (and energy) bulls for some time now. Nothing changes this week in that regard. Decent hammer on Brent Crude Oil weekly chart and many structural reasons to remain long. Oil demand is the highest it has been in decades and production, although ramping up, is going to find it very difficult to keep up to demand. Stay long.
We still like Gold over the next few years. In the short-term, equity markets might keep pushing higher and Gold keep pushing lower. When eventually the chickens come home to roost and interest rates are hiked and growth stocks are no longer growing… Gold will shine bright in the risk-off world. For now it seems that the bull flag is playing out, but this is a weekly chart and much time must pass before we will get another signal.
Is that a falling wedge formation on the weekly chart?
At this point we’re just impressed that BTC is still trading around this $35k level. An interesting side note here – more and more top tier banks are allowing their more sophisticated clients to settle and trade in Bitcoin. There is an ocean of institutional money trying to get into the space. Could be interesting.
VanEck Vectors Oil Services ETF (OIH)
One of our favourite positions in the current market is giving a good opportunity to get on the bus (or add). The 50 and 20 week moving average crossover while under the 200 week moving average, is something we consider to be a ‘medium-term trend change signal’.
Preparing for the worst
The following stocks are all overvalued, in a down trend and has shrinking or negative earnings. The bottom of the barrel if you will. Thus, they are short trade ideas that can be used to hedge some downside if the market does not play nice in the week ahead.
Generation Bio (GBIO)
1life Healthcare (ONEM)
BioXcel Therapeutics (BTAI)
Global Blood Therapeutics (GBT)
Relmada Therapeutics (RLMD)
Hoping for the best
The following stocks all meet our requirements to be included in our ‘investable universe’. They have also most recently triggered buy signals.
Entravision Communications (EVC)
KLA Corporation (KLAC)
Helen of Troy Limited (HELE)
Malibu Boats (MBUU)
South African trade ideas
JSE Top 40 Index (ALSI)
All that bearishness and here we have a bullish chart. Provided the world does not unravel after Jackson Hole, this setup looks decent. Keep in mind that even if the world unravels, it’ll probably push this index up on the back of rand hedges and commodity stocks thanks to ZAR weakness. Momentum is still in the middle of nowhere, but it is trying to turn bullish as well. Perhaps in the shorter-term (over the next few weeks) markets will remain strong and we can see a decent bullish break here?
Aspen Pharmacare (APN)
British American Tobacco (BTI)
Compagnie Financiere Richemont (CFR)
CFR has had one amazing run. We’ve been long this stock since around R155. Time to ratchet up the trailing stop loss. Although this is a weekly chart, we think using a shorter time frame (like 1 day or maybe even 4 hour) to set the ATR based stop loss is the right move here. Not too tight to take us out needlessly, but tight enough to protect us from any ‘new covid case numbers’ panic selling, if that happens.
Clicks Group (CLS)
We tried to fight this one a little bit, but the trend is up and a break above R265 would probably make a good buy.
Dis-Chem Pharmacies (DCP)
Ol Loch Ness over here is looking pretty good. A break above the R32.50 level will also make for a decent risk-reward long trade.
Life Healthcare (LHC)
LHC is looking fairly good on the weekly chart as well. It’s back above the 200 week moving average and it seems to have some bullish momentum as a backwind. Once life starts to kind of return to normal, private healthcare will be able to earn from ‘business as usual’ activities, such as elective surgeries and the like. Is this the makings of a trend change?
MTN weekly chart is looking good! If it can get up through R110, there are clear skies ahead. We note that weekly momentum is fading a little, but as it stands now, that is unconfirmed.
Another private healthcare stock, another bullish weekly setup. Maybe just a run to the 200 week moving average? Needs to get up through R15.50 and actually stay above it first though.
We tried to fight SOL last week too, and like with the other shorts, we came short. Looking at the weekly though, we really like the 20 and 50 week moving averages crossing over. This generates a longer-term buy signal for us.
And that is all we have for this week. As usual, if you would like to know more about trading with us or joining our community, please feel free to contact us and we’ll be in touch.
*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.