The time is finally here and soon we will know the fate of markets for the next six months. We’ve mentioned before (both here and on various radio shows) that the second half of the year will likely be determined by how this current earnings season plays out in the U.S. To briefly explain; what we’ve been seeing so far is that equities (and other risk assets) have been re-rating based on higher inflation, higher inflation expectations going forward, and the consequent tighter monetary policy stance that central banks will be forced to take because of it. Essentially, the ‘risk-free’ rate in asset valuation models is now considerably higher and thus the multiples on which many equities have been trading no longer justifies the potential excess return investors could get from owning them. Now, however, comes the moment of truth. It’s all about earnings as companies start to report 2nd quarter numbers this week. If we see that earnings is down broadly, we think that could lead to the second leg lower of this current bear market. Until now, despite high inflation and the odd absolutely counterintuitive personal stimulus cheques American’s have been getting, corporate earnings have been rather robust. The post-covid world has served the world’s largest corporations well… but has the money printer eventually managed to do more harm than good? In our view, yes. But, let’s see what the market thinks once we start to see corporate earnings pair back. We think that this earnings season will disappoint and we will gladly eat our hats (and buy stocks) if we are wrong, but, if we are not wrong we expect the market to keep trading lower until either the Fed capitulates and starts up the printing press, of we work through and eventually come out of the first proper recession in a very long time.
Offshore trade ideas
S&P 500 (SPY)
Last week was a little bumpy, as could be expected. Interestingly, sentiment is pretty poor and contrarian indicators are starting to show that the time for buying approaches. However, until we’ve seen how the market reacts to the upcoming earnings season, we’re not changing our view. Thus, we still think SPY trades lower to the marked target area. It’s all about earnings, and if earnings disappoint, it’s going to get messy.
Following our thoughts above, should there be a positive earnings surprise among the tech giants, we could see QQQ testing the (green line) $309 region. That said, if we’re right about our view on earnings season, odds are good QQQ trades lower.
All Country World Index (ACWI)
ACWI is just more of the same really. It’s all about earnings and thus any view that we have now is rather loosely held. We’ve highlighted our target area for ACWI, but note that it will likely take a poor earnings season and a bit of a global recession to get us there.
MSCI China ETF (MCHI)
“So with all this negativity, is there even anything out there worth buying?” we hear you ask. Well, yes. We think that building a longer-term long position in China now is an astute move. In fact, we could even argue for a pair trade here… long MCHI vs short SPY. This might be a lower risk way of getting early access to China before the fate of the world is known.
U.S. Dollar Index (DXY)
In recent months, capital has been fleeing to the U.S. for ‘safety’, although that boat might get rocked a little if U.S. corporate earnings disappoint in the coming weeks. We also note some bearish divergence on the DXY chart. Perhaps it’s time for a pullback?
Gold has not been as shiny as it probably should be during the current turmoil, although it is approaching support (at $1676). We can comfortably say that our symmetrical triangle setup has failed, so perhaps horizontal support will provide a level to take a trade from.
Brent Crude Oil
Well, it looked like Oil wanted to test the primary trend line at around $90. It’s not impossible for this to still happen (and if it does, we say buy), although it seems that the horizontal support at around $98 has held for now. That said, we still think that we will get a chance to buy around $90. It’s all about earnings now, and as mentioned what feels like a thousand times, if earnings are bad markets will ‘price in’ a recession… which no doubt will drive Oil lower.
As is the case with DXY above, there is some bearish divergence on the USDZAR and we think it probable that we see (if earnings are bad in the U.S.) the USEZAR pair back to the R16.50 region.
South African trade ideas
Sadly we do not have too many local ideas this week. The above narrative dictates directionality at this stage, so making predictions on individual stocks is a little more tricky. We do have two ideas at least.
JSE Top 40 Index (ALSI)
We’re not going to say that it’s all about earnings again… you get the idea. In the bear scenario, we think ALSI could come down to test 53000 as it completes the bearish break from the upward sloping channel it traded in for some time.
Coronation Fund Managers (CML)
Earlier this year we pointed out that CML was in trouble and the stock has almost halved since then. Now, for the higher risk momentum traders out there, there is a little break of support that could act as a decent entry point if you wanted to follow the trend as far as it goes.
The writing is not on the wall yet, but below R125, REM looks like it will make a great short trade.
Herenya Managed Portfolios
We’ve not made too much noise about this (yet), but Herenya now has three portfolios that clients can invest in. Our performance has been rather good (if we must say so ourselves). In time we will build a dedicated page on our website for our managed portfolios, although for now we would just like to make our latest fact sheets available for download. Below are some details about our managed portfolios, as well as the latest fact sheets for each. Please contact us if you would like to invest in one or more of our portfolios.
Herenya Offshore Long-Term Equity Portfolio
Herenya South Africa Long-Term Equity Portfolio
Herenya Active Trading Portfolio
Joining HCA trading
HCA trading offers a number of different trading accounts to suit different types of traders. Our offshore trading accounts allow traders to buy shares, ETFs, CFDs and even fractional shares in the United States for only $2 a trade. Locally, we offer shares, ETFs and CFDs at good rates with robust and reliable trading platforms. All our trading, including CFDs, is done on a Direct Market Access basis and thus our clients are able to interact directly with the real equity market and not have to worry about excessive counterparty or liquidity risk. Our prime broker locally is a big four bank and offshore we make use of one of the largest non-bank prime brokers in the world.
Local stockbroking rates
|Trading instrument||Brokerage rate||Margin rate||Minimum trade charge|
|JSE listed equities and ETFs||0.30%||100%||R150|
|CFDs on JSE listed equities||0.20%||10% – 25%||R50|
|SAFEX listed index futures (ALSI)||R20||6% – 8%||R20 per contract|
Offshore stockbroking rates
|Trading instrument||Brokerage rate||Margin rate||Minimum trade charge|
|U.S. listed equities and ETFs||USD 1 cents per share||100%||USD 2|
|Canada listed equities and ETFs||CAD 2 cents per share||100%||CAD 2|
|U.K. listed equities and ETFs||GBP 12 + 0.1%||100%||GBP 12|
|Germany listed equities and ETFs||0.20%||100%||EUR 8|
Subscribe for post updates
If you enjoy reading our blog and would like to get email updates each time we post, please subscribe below.
*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.