Markets rallied hard on Friday, although honestly, we are not convinced. From a technical perspective, there are still some strong overhead resistance levels, and from a macro perspective, the picture is still not looking very bullish. The guidance we get from the Fed is often backward looking and from some of the research we have been reading, we can see that even leading up to and into the 2007/08 Global Financial Crisis, the Fed kept reassuring markets that everything is fine… until it wasn’t. We suspect that this time is no different. The tug of war between the bulls and bears is intense and volatility is wild. Our stance is to use any strength the might be available in the week to come as an opportunity to get out of stocks and manage our exposure. The time for nimble positioning is upon us, and we must stay flexible and willing to react to a fast changing market.
Bigger Picture (offshore trade ideas)
S&P 500 (SPY)
SPY has still not cleared the $420 level (4200 on the index). Yes, Friday was a ripper, but SPY still ended the week lower. As long as SPY stays below $420, we will remain bears. If, or once, SPY breaks above $420, we can buy into that strength, but until then we will remain very cautious and distrusting of this market.
Nasdaq (QQQ)
The QQQ looks a little better as it managed to close near the weekly highs and looks to be in a more bullish setup. It is almost as if this entire index is hanging on to Apple and if anything happens to the titan, things might turn sour for QQQ. It’s hard to shake our bearish bias here, but QQQ might turn out to be the thing that changes our view. The contrast between the setups on QQQ vs SPY is indicative of the tug of war happening in the market, and thus the tug of war happening with our views. The safest bet is likely to step back and allow the market to unfold a little before making any risk-taking decisions. It’s ok to miss the first part of the move, so if our predominantly bearish view here is wrong, we are happy to buy into a new bull market if it comes. For now though, we are still playing the defensive game.
S&P 500 Volatility Index (VIX)
The VIX got going nicely during the week, although Friday saw a turn in fortunes. As you can tell by now, we are not convinced and we stand by our call to buy VIX calls. The tug of war is only going to get worse in our view, and the VIX should pump a little off all this uncertainty.
Gold
We put out a gold chart on twitter on Thursday asking if this might be the top for Gold for now. After Friday’s session, it looks like that might well have been it. Again though, we are not entirely convinced. The facts here are that the Chinese and Russians are still buying record amounts of Gold in the physical market, and the economic headwinds facing the more Westernised Developed Markets have not gone away. Maybe a soothing balm was put on the wounds on Friday, but the reality here is that there is a lot more pain to come. At least, that is what we think at this moment. We are open to Gold moving down somewhat from here, but our base case expectation is that Gold will likely keep pushing and more than likely print a new all time record high. Hold on folks, the tug of war is going to create a lot of volatility.
Brent Crude Oil
Oil managed to get to the bottom of the range we pointed out a number of weeks ago. A bounce back to the top of the range is very likely and we will be using it as an opportunity to get out of the last of our oil facing equity holdings. If the ‘mild’ (narrator: it won’t be mild) global recession in the second half plays out, there is almost no way that Oil will be able to hold the $70.50 level, even if OPEC cuts production aggressively.
U.S. Dollar Index (DXY)
Some time ago we would be arguing that given the bad global economic conditions, the USD should strengthen as investors seek ‘safety’. Now though, maybe investors are starting to realise that Dollars (and the USA in general) might not exactly be as safe or strong as they had always thought. We think that there is a bit of a global power shift happening and that, sooner than we think, BRICS will be the new global powerhouse. DXY below 101 opens for bearish trades and stronger Emerging Market currencies. This will be in our favour.
USDZAR
A bit of a sideways consolidation / tug of war here. Keep your eye on DXY for guidance. We think that a weaker USD is the most likely outcome, so we are calling USDZAR to R17.60.
South African trade ideas
JSE Top 40 Index (ALSI)
So alright, we are bearish on the global picture. It is difficult and painful to be bearish on the local front though. Sometimes markets defy our beliefs… what’s happening here though is the power of rand hedged stocks, commodities stocks and of course, Richemont. CFR currently makes up around 17% or so of the total weighting of the ALSI, which is A LOT. CFR has also been running very hard thanks to luxury goods generally making record profits while the world falls apart. Eventually, well, rather soon actually, CFR will be downweighted in the ALSI and its influence of the headline index will lessen. We think that once that happens we might see the ALSI come inline with global markets a little. For those who entered the short on the tertiary trend line break, you can move you stop to the 72700 level.
City Lodge Hotels (CLH)
CLH has been power! Nice bullish setup here with a target between R4.60 and R4.80. We’ve seen a return of both local and international tourism in South Africa and hotel groups are looking very attractive at the moment.
Sibanye-Stillwater (SSW)
SSW has not run as hard as most of the goldies, but SSW is not exactly a gold stock anymore. It’s been under some pressure thanks for the three other constituents of the PGM group (Platinum, Rhodium, Palladium – and Gold of course). Finally it is starting to show some signs of life. Remember also that Froneman bought SSW stock just above R36, and he has a great track record of trading his own stock. Hold on to your longs here, because in a year or two from now we might see SSW back at R70 or higher.
Anglo American Platrinum (AMS)
AMS has also not participated in the gold rush, obviously because it is not gold. But as is the case with SSW above, AMS is starting to look really attractive. Entering a long here with a first target of R1300, second target or R1400 is in our view a low risk easy trade.
Bidvest (BVT)
Another bullish setup here on BVT. Wait for this flag to break and take the long if you are a trend follower.
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*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.