Rotation: Value Stocks are overperforming in September



In a week plenty of important economic news (Fed rate cut decision at Wednesday, Trade War concerns, Crude Oil price /CL spike after a drone attack, the recent ECB stimulus, the Friday Quadruple Witching, the huge spike in Repo Market rates yesterday), one is going unnoticed and I think it's crucial for exchanges in the mid-term: the "Great Rotation", as it has already been baptized by investors.


Some basics 


As you know, the Value stocks are those with low PE (Price/Earnings) and very stable fundamentals, and are opposite to the Momentum (or Growth) stocks, more focused on the aggressive growth of its value in the mid and long-term. This last, that have driven the bullish Wall Street rally for almost 10 years, is followed by the iShares Edge USA Momentum Factor ETF MTUM and includes giants companies such as Visa V, Mastercard MA, Microsoft MSFT, Disney DIS, among others. Meanwhile, the value stocks are followed by the iShares Edge USA Value Factor ETF VLUE which portfolio contains stocks like AT&T T, Intel INTC, IBM, and Bank of America BAC. Its average PE is 11.47 vs. 18.40 of the SP500. That's very undervalued, as you can verify in the chart above, a comparison between both ETFs performance in the last 5 years.


While MTUM has outperformed VLUE in the last 5 years, that began to change in August and VLUE's rally has accelerated month-to-date, as its risen 7.4.%, versus a 2.8% rise for the SP500 and a 0.2% decline for MTUM.   






What happened?


However, the previous week a great move was seen in the positions of the "smart money", the great investors that drive the stock market. Their portfolios have moved (rotate) from active momentum to value stocks, and in an abrupt, almost atypical way. Why? Only they know... The fact is that these changes (the last rotation was in 2011) always impact in the markets, although we don't know the direction it will take. In numbers: while MTUM has outperformed VLUE in the last 5 years, but since August' last week the VLUE's rally has accelerated month-to-date, rising 7.4.%, versus a 2.8% rise for the SP500 and a 0.2% decline for MTUM.   Here more technical details, with amazing charts.

Already some investors fear a downturn soon. But the fact is that this data only suggests that momentum stock are ready for a correction, and a rally in value stocks, but only depending on the economic behavior and next Fed decisions. A recession, or a slowing economy until 2020 invite the Fed to more rate-cuts to boost the economy and steepen the yield curve. 




Russell 2000: time for an entry?


This rotation explains the divergence between the main indexes of the market: the last days of the Russell 2000 RUT, plenty of value stocks, has shown, by far, a much better performance than their pairs SP500 and Nasdaq. Undoubtedly, the Trade War affected and continues to affect much more these small companies with their production costs increase to the detriment of their margins and profits, but the index increase is there and seems nice.

On the other hand, the next sure Fed' rate-cut this week, which will reduce loans, will also favor Russell companies. This is understood as investors consider that increase in interest rates is especially expensive for smaller companies that tend to receive financing through adjustable-rate bank loans, rather than fixed-rate debt financing at which larger companies can access through capital markets. Their balance sheets may be adjusted in the short-term, and thereby improve the price of its shares and then the whole performance of the RUT index that in its last 52 weeks is still down 4.5%. These facts make IWM and IWN, ETFs that follow the Russell, great candidates for a buy in a mid-term, considering that, unlike the previous ones, they haven't reached their previous highs.

Technical analysis also helps the Russell 200 stocks: the daily chart of the IWM shows its price is breaking the resistance of a strong 52-week down trendline with heavy volume. Now above its 3 main SMA averages and the Ichimoku cloud, only need to retest this line at $155 to confirm the bullish breakout. Keep an eye on IWN, the ETF that follows only value stocks from the Russell. I presume a better performance there.




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World Economic News, at a glance


- Retail Sales just doubled estimates at 0.4% along with a bonus revision in the month previous to solidify the overall staying power of the consumer. 

- The good news may be enough to inch the SP500 SPX closer to its all-time high of 3,027.98 which is now less than 20 points away. 

- The ECB announced plans to cut its bank rate by 10 basis points to an unfathomable 0.50% yesterday as stagnant growth persists in much of the region. 

- Monthly QE purchases will begin in November at a rate of 20B Euros in an attempt to jumpstart the latency. 

- European markets appear to be ending the week on a positive note other than the UK which is off modestly as the Brexit hash-out continues.  

- Encouraging news on the trade front indicated that China just exempted some agricultural products like soybeans and pork from enforceable tariffs as sure appeasement to further negotiations. The largest soy purchase since June was also ordered which will hopefully open the floodgates to more sizeable purchases.  




- The Japanese Nikkei has approved of the latest efforts considering a 9th straight winning session now secured. 

- Overall, volatility has contracted measurably over the past weeks with a 14 handle, registered in today’s session for a 4th consecutive drop in the CBOE Volatility Index (VIX). 

- The yield on the 10-year Treasury Bond TNX continues to snap back with a current reading of 1.836% after the latest economic figures broke. A higher close on the day would mark a 5th straight jump in rates after bottoming at 1.429% just last week. 

- Oil futures /CL remains little changed with crude sitting at $55.50 a barrel despite agreements from major producers to keep production in check ahead of the weekly rig count.  

- Gold /GC has held its ground the last few sessions with a minuscule gain appearing ahead of the open as central banks grapple with the reality of negative rates. 

(Text is taken from TradeWise Market Blog.)

Is this the main reason for the latest, and desperate, Trump tweet "rate cuts to zero"? A recession is likely coming, and could cost its re-election next year. Now he is open to an interim trade deal with China, and markets react positively with that news, touching the SPX its all-time highs.


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Trader Notes: Importance of the Yield Curve


(Update from August 2018 post)

The Basics:


Mentioned here in several posts, the yield curve,  take importance in these weeks because it's reaching a flat level that had not since 2007, with possibilities to invest for 2019, this with clear damage to the stock market. Why? Let´s briefly explain you.

Understanding how this curve is drawn, its types (normal-reverse-flat-humpback), its inclination (steep or flat) and its relationship with the market, will allow us to make better trades. Also knowing its basic principle: the direct influence of the short-term yield bonds is the i-rate assigned by the FED, while the long-term ones depend, also directly, on inflation and how it is eroding the value of the bonus in time.

The yield curve is formed on an XY chart with the maturity times of the US Treasury Bond on one axis and the interest rates on the other. In an expansive cycle, there is a growing slope, as it is obvious that, at a longer time, higher yield is expected through a higher interest rate. Flattening occurs when the differential or spread between the extremes approaches. 

In StockCharts you can observe the yield curve and the SPX index at any moment. Verify its flattened form today, here: https://stockcharts.com/freecharts/yieldcurve.php


On the stockcharts link: just choose a year in the SPX to see how the yield curve was that moment.

Yield Curve behavior


Depending on the state of the economy, four cases can occur:

1. Bull steepener: occurred after the crisis in 2008 when the FED became dovish and in order to heat the economy, began to lower rates, so the short-term i-rate fell faster than the long-term. Notice that a bubble was created in the price of the short bonds, whose consequences are seen until today.

2. Bear steepener: it´s seen only the first months after Trump's victory, when an increase in inflation and FED Rate Hikes were foreseen. The steep slope was a sign of an expanding economy.

3. Bear flattener: occurs this year, when the FED adopts a more hawkish tone and short-term rates rise faster than long-term rates. The slow pace with which inflation advances flattens the curve, with the risk that it will reverse, which is a sign of the beginning of a recessive cycle.

4. Bull flattener: after a recession, reactivation is appreciated when the influence of inflation decreases in long-term rates and these fall faster than short-term ones. It is usually a good time to buy long-term bonds.


Understanding the rate curve is decisive to invest taking advantage of the inflation and i-rate data. Check this didactic article by Felix Baruque for more information.






Divergences in Wall Street and a crucial chart


Already since January 2017 I wrote about the beginning of the flattening. With the months it was accentuated and today its investment is a worrying possibility. Some important FED members express their opinion: for example the dovish James Bullard consider the yield curve inversion a real possibility and a bearish signal for markets. On the other side, a hawkish John Williams said yesterday that FED shouldn't be afraid, because he considers that wages are still slow and with the field to continue growing.  Also Steven Mnuchin, the Treasury Secretary and promoter of the Trump's tax reform, said he´s perfectly content the flat yield curve...

The fact: a way to see graphically what can occur to economy, and therefore the stock market, is checking the differential between the bond rates. It is usually used as a spread data, the 2-year and 10-year bond yields, although other authors prefer to use the 3-month and 10-year bond. On this Bloomberg chart the spread is shown between the 2 and 10 year bonds since 1977. Look: whenever there was a recession cycle (in green) the spread became negative a few months earlier.



Also Wall Street main banks, Citibank C, Bank of America BAC and JP Morgan JPM, had been having a tough year, this flat yield curve not benefit them, despite the tax reform and the 10-year Treasury Bond TNX near to the 3% rate, its higher since 2013 . The financial etf XLF also had a negative YTD. 


Conclusion


Consider the following:
- The current flattening is due to successive FED Rate Hikes, in addition to the slow progress of inflation. 
- In the US more than 50 years ago, this behavior has meant the preamble of recession, which usually pulls down in the stock market. 
- There is almost consensus that two consecutive quarterly GDP decreases signals the start of a recessive cycle.
- Today the jump in Average Hourly Earnings (2.9% vs 2.8% consensus) tell us a lot about how inflation and wages are moving, and fears of more Rate Hikes.

From the point of view of the bonds, which always anticipate the stocks, it does not seem time to enter long on stocks, because the historical statistics shows that when the curve is reversed the recession begins, and that event is close to occur.So my best advice is to check the evolution of this spread in the next days and weeks. Swing trading, with risk management emphasis is, in my vision, the best option for the market today




 >>> Update:


The investment between the 3-month Treasury bill rate and the 10-year Treasury yield, which some economists believe is a more reliable recession indicator, has been underway since May to date. That curve was reversed in March, became more pronounced in April and then reversed again.

And finally this month the main spread, the 2/10, inverts. Now investors aren't being paid to take on more risk and that's a bad signal for an economy. Why lend my money ten years, if with only two years I get more yield? As the 2/10 has a decent record tracking forward recessions, is likely that the U.S. will begin to show the first signals of it next year or in 2021.


History also indicates that the inversion may be brief before a more sustained and severe change occurs. So, a big challenge is in the hands of Trump and his economic team with its Trade War cooling the economy and slowing inflation, and Powell and the Fed lowering interest rates more quickly for revert the curve. 



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Important FED Speaks this week


(Update from January 2019 post)


A Hawk and a Dove.


A preamble:hawk, in monetary policy, is generally in favor of higher interest rates and less stimulus. He believes that inflation is already high and he needs to adjust the monetary policy to avoid it, even at the expense of unemployment, and thus maintain stable prices. dove is quite the opposite: it prefers to maintain or reduce rates and favors more stimulus because he fears the high rate of unemployment and does not believe that the current inflation rate is high enough to worry about. 


FED Board of Governors


The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the FED. It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States. The Republican Jerome Powell is the current Chairman. The other 15 current members of the Board of Governors, and mainly its position (hawkish, dovish or neutral) are as following:

This year the voting members are Bullard, Brainard, Powell, Bowman, Quarles, Clarida, Evans, Williams, Rosengren and George. Meaning more hawks (4) than doves (1), with 5 neutrals. Next years voting members change.




And this week, the FED Speaks


The Fed communicates through speeches, press releases and testimony to Congress. Each event is analyzed as to any indication of a change in policy. Even the smallest change in a phrase, including a single word, can impact the markets. And this week a number of FED speeches will get market attention, as investors watch for further clues on interest rates.

When the Fed member indicates that there will be an expansion in monetary policy, it is a positive sign for stock prices in the future, and a buy signal for many traders, because a growing economy will increase revenues and the value of publicly-traded companies. If the Fed indicates contraction in the monetary policy, which means it is trying to get the economy to slow down, it is a negative sign for future equity prices, as business growth will likely slow in the near term.

My tip for days of FED Speaks to take advantage in our trades: the market follows little to the members of neutral tendency, so be attentive to the following: see if some connoted dovish member makes a slightly hawkish speech, or vice versa. That is to say, the unexpected. That moves quickly the market in one direction, bullish or bearish, as the case may be. Quick profits there, mainly trading the volatility VXX or UVXY. So, watch out carefully for Neel Kashkari, Esther George, and John Williams this week.



 >>> Update:


Fed Chairman Jerome Powell will speak on Friday in Switzerland. Powell will be accompanied by other panel speakers including, Fed Governor Michelle Bowman and four regional presidents: Boston Fed's Eric Rosengren, New York Fed's John Williams, Minnesota Fed's Neel Kashkari and Chicago Fed's Charles Evans.

With expectations running high the Fed is set to cut rates in just under two weeks, Powell's speech will likely be parsed for clues on whether the central bank is leaning more dovish in the run-up to the Fed meeting on Sept. 17-18.



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Technical levels for my Watchlist Stocks


1. Cree CREE, $42.93
Its low 2019 guidance in its last earnings report (despite beats sales and EPS inline) plunged the stock from its comfortable $55-65 ($69.21 at highs) range since May to $43-45 levels, evaporating all its year gains. Its year pivot point is at $41.78 so it's worth keeping an eye there for its reaction at that level: if it rebounds or continues its falling to $40.84, its YTD low.

2. Dropbox DBX, $17.90
Same as Cree, lowered its guidance in its last earnings report, and the stock price sank more than 20%, verifying that Wall Street is yet reluctant this year to these cloud companies like Box or VMWare, both at year lows. Its recent all-time low at $17.20 is the level to check. Last week MACD bullish cross with low volatility gives some hope that this stock is rebounding now.

3. Disney DIS, $137.26
A winner-stock for this year, completes its pullback from $147.15, its all-time highs, and last week began its bouncing. At $137.60 is it month pivot point, the next resistance for this week. Hold this stock, even until 2020.




4. Fiserv FISV, $106.94
I continue long in Fiserv since I recommend this stock in January when they complete its First Data acquisition. Great performance this year. Is natural next resistance is its all-time highs at $108.57. In its 1-hour chart, an ascendant triangle was formed, so we have here also a support for the next sessions. 


1-hour chart of Fiserv FISV, showing a bullish ascendant triangle. It's great to do trading when a pattern appears in a chart because support and resistance levels are very clear.


5. Gilead Science GILD, $63.54
All 2019 its price is ranging in a symmetrical triangle with very strong support, below its SMA200 average. Its year pivot point is at $70.80. I look a bearish bias for this biotech stock, as all this subsector (XBI flat all the year).

6. Illumina Inc. ILMN, $281.34
Now in a bearish trend due to its recent earnings report that didn't satisfy Wall Street. It beats EPS (but less YoY), miss revenues and widely lowers its guidance for 2019. Analysts punished the stock with several cut-price targets and a downgrade by Cannacord. Now is trading more than 25% below its July all-time highs, and below its year pivot point at $293.35, being $268.62, its YTD lows, its next support.




7. The Kroger Co. KR, 23.68
Keep an eye on retail sector, I wrote recently, as it could fuel the next bullish rally in Wall Street support in good July Retail Sales reports. Despite increasing tension in the Trade War, this sector seems improving last week, and the food retail Kroger, due to its less exposition to China, seems an interesting choice. Recently breaks the resistance of its bearish downtrend channel in its daily chart, also retesting it. Now price moves above its Ichimoku cloud and two main SMA averages: 50 and 100. September 12th. reports its Q2 earnings and could mean a turn in its bias. $24.82 is my target, before earnings.


Daily chart of Kroger KR, showing recent break of its bearish channel. Next days the price returns to that level with lower volume (reaction) and then rebounds there (resolution) filling the three phases of a successful breakout.

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Two Retail stocks for next months: KR and ROST



The Kroger Co. KR, $23.92.



This stock is especially important in these days of Trade War escalation, using it as a hedge, due Kroger operates retail food and drug stores manufacturing its own products, so, unlike other retail stores, have little exposition to ChinaLast week, I emphasize that retailers could fuel a next market bullish rally, due great July Retail Sales report.

Kroger is near 20% down this year, however, the company reports decent Q1 earnings, showing that its CEO Mac Mullen probably finds a way to reverse after an ugly 2018 (-26%) a bad year for all the retail sector. An early August' upgrade from Pivotal Research fuels the stock from the $21 level, "a cheap price enough for a buy" as they said. And also last week 
announces a test concept with Walgreens WBA, expanding its Express store-within-a-store pilot in Tennessee. Seems interesting.

Technically, the stock is finally breaking the resistance line of its downtrend channel that began in March. Yesterday its price rises near 3% and closing above the Ichimoku cloud but still is below the key SMA200 average, and needs to confirm the breakout this week. At $24.40 level is where I place last week my buy-alert, with a target price of $27.50.


Daily chart of Kroger KR, showing how breaks today its quarterly bearish channel. Needs to confirm this upper move this week, before its Q3 earnings report on September 11th.






Ross Stores Inc. ROST, $104.57


Last week, this popular discount retailer reports its Q2 earnings and show acceptable numbers but Wall Street didn't digest them well (closes -4%, but in a market sell-off day) with this stock as do recently with other retail stores earnings reports. Both EPS and sales, again beat consensus, its operating margin was better than expected, but lowers its full-year guidance (Ross usually did that with guidances!), due to new China' 10% tariffs, which is its main issue in the short-term if Trade War escalates more.  

Despite this, analysts maintain many hold or buy ratings (Wells Fargo, Citigroup, MKM Partners, Morgan Stanley, Jeffries, Bank of America) and other also raised them, as Deutsche Bank and Guggenheim. No one downgrade, no one lowers rating: good signal for a post-earnings trade, due Ross is doing very well, and taking advantage of the pullback this week


Technically, all 2019 its price is moving in an uptrend channel (+29% YTD)  above its SMA200 average and Ichimoku cloud. Since July is ranging between $102-108 and today is  testing its SMA50 average. The bias is bullish, so, I set my buy-alert this week at $104.60 its monthly-pivot, close to its all-time high at $108.20.


Ross Stores ROST daily chart showing its year bullish channel. Analysts believe the stock can continue its bullish bias during the rest of the year.

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Markets: quick review of the last, choppy, week


Market Pulse.

U.S. equities were on track to finish higher for the week until China unveiled a new round of retaliatory tariffs and President Trump vowed to respond, unnerving markets.  In this new episode of escalating trade tensions, China announced that it would impose tariffs ranging from 5% to 10% on $75 billion of U.S.goods in two batches, effective on September 1st and December 15th, including a 25% tariff on U.S. cars. 
The S&P500 (SPX) finished Friday down  2.59%, concluding the volatile week down 1.4%.  The index is now down 4.5% for the month of August and 6.0% lower from the record high it reached in July.  The Dow Jones Industrial Average fell 2.4% on the day and finished down 1.0% for the week.   
At the annual central bank summit in Jackson Hole, Fed Chairman Powell left the door open for another rate cut when the committee meets next month, acknowledging the risks to global growth from trade uncertainty.  
An inverted yield curve (when long-term rates are below short-term) continues to cast a shadow on stocks amid fears that it’s signaling an imminent recession.  
Long-term rates have dropped below short-term rates in small part because the outlook for growth has waned, but also in large part because negative rates abroad have attracted buyers of U.S. Treasuries pushing yields lower than they otherwise would be.


Trying to find new supports for the SP500, the rounded 2,820 seems important as during all August its price is bouncing in that level. If the plunge continues this week, the SMA200 average is powerful support for this week. Only Trade War' good news could convert SPY in a good "buy-the-dip" trade.




Futures Markets for today.

After a whippy week, U.S. equity futures are picking up where they left off last week, amid growing concerns over the U.S.-China trade war.  S&P 500 futures (/ES) initially opened 1.0% lower last evening after President Trump stated at the G-7 summit in France that American companies were ‘hereby ordered’ to look for alternatives to China and that he could declare the escalating U.S.-China trade war as a national emergency.  Futures turned positive after Mr. Trump said China had called U.S. trade officials and asked to get back at the table for talks.  
Economic data out this week includes the durable goods report for July, the Consumer Confidence survey for August, and the Bureau of Economic Analysis is expected to revise down its initial estimate of second-quarter U.S. GDP growth to 1.9%, on Thursday.  
Finally, personal income and outlays data, along with Chicago PMI is due out on Friday. There are just a few earnings left for the second-quarter with Best Buy (BBY), Dollar General (DG), Dollar Tree (DLTR), Burlington Stores (BURL), Ulta Beauty (ULTA) and Campbell's Soup (CPB) all reporting this week.   As of this writing, U.S. crude oil futures (/CL) are 0.3% higher near $54.80 a barrel and S&P 500 futures (/ES) are 0.7% higher near 2875.

(Text is taken from TradeWise Market Blog.)

Main world economic events for this week August 26 to 30th. Keep an eye in U.S. Gross Domestic Product (Thursday) and the PCE Index (Friday), the favorite inflation indicator for the Fed. Thanks to @econoday.

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Trade War escalation today: some notes


The most awaited news on Wall Street today, the Powell's speech in Jackson Hole, was almost forgotten by investors and traders, due he didn't tell nothing new, but most because today the Trade War reached its peak of intensity. A round trip of attacks via tweets that ended with both countries, U.S and China, raising their tariffs, and with Trump ordering companies in his country not to have commercial relations with China and start looking for other countries (as if it were easy to find a similar market!). Wall Street plunges with all this news in a strong sell-off: the SP500 SPX closes -2.59% at 2,847.11

Some notes: 


- Whoever says that the world is not headed for a global recession, lies. It is unavoidable.
- It is no longer interesting to look at the inverted yield curve in the US on a daily basis, hoping to read that the risk of recession decreases: the Trade War is getting worse and has no solution in the short term. 
- The economy deceleration is global and many world central banks are already taking action, some strongly (Japan, Eurozone), others lukewarm (the US with the Fed).
- But, finally, the Fed can do little by lowering rates or steeping the curve if the war deepens even more. 
- Those who must decide this conflict seem misplaced. On the one hand, Trump, altered and impulsive, believes that with his tweets he can intimidate the Chinese, and they have already shown that they know how to counterattack. And Powell does not seem to have the necessary skills for the job, besides he does not know how to handle the many discrepancies between the Fed Presidents that make the Fed look very disoriented and especially slow. 


Powell again defrauds investors without any important decision during Jackson Hole speech. Same words, less action, nothing new.




More ideas:


- The Yuan will be the protagonist in the coming weeks. The Chinese government handles it, and at any time it can be lowered again. Today is already above 7 in its ratio with the dollar. Trump wants to do the same with the dollar but the Fed does not leave it. 
- China is the holder of the largest amount of US treasury bonds. If Trade War sharpens, they can think of starting to sell them massively in the secondary market, increasing their offer and lowering their price, or what is the same, increase their yield, which would be a nuclear explosion for the already giant U.S. public debt. But, also for the Chinese make this play also involves many financial dangers. 
- The Fed can weaken the dollar without rate-cuts, through some quantitative-easing QE: create dollars, buy bonds, accelerate the economy, and be very cautious with the inflation evolution. The formula was applied successfully after the housing crisis of 2008.
- Trump and his Trade War will have consequences on U.S. internal growth. Is illogical pretend to have strong growth, the stock market in all-time highs and a reducing fiscal deficit during a Trade War. Previous experiences suggest that the only reliable way to reduce the trade deficit is to push the economy into a recession. 
- So, if nobody favors, why both countries continue with this awkward trade war?


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Keep an eye on Retail Sector


Seems incredible, due to its past performance struggling an entire year, but now the retail sector could fuel the next bullish rally on Wall Street if it happens. You know, essentially, retail sales cover the durables and nondurables portions of consumer spending. And consumer spending typically accounts for about two-thirds of GDP and is, therefore, a key element in economic growth. And Wall Street stocks love strong economic growth, best if it comes without excessive inflation as the current environment.

Now, some of its main and iconical stores had great earnings this season, beginning last week with Walmart WMT, and continuing this week with Home Depot HD, Target TGT, and Lowe LOW. The ETF that follows this sector (XRT) hit historical lows past week, but after those company results, and also a nice Retail Sales July report, a buy-the-dip trade here isn't a bad idea now

Check below the highlights: all major readings easily surpass the consensus.  More: the non-stores sub-sector monthly sales jumped 2.8 percent following gains of 1.9 and 2.3 percent in the two prior months. This component is dominated by e-commerce which is making increasingly greater gains at the expense of brick-and-mortar stores. Department stores have been one of the victims (remember Sears last year) but not in July with a 1.2 percent sales jump. 

Is a turn next in the retail sector? It's likely. And if Trump is considering tax cuts in payrolls or capital gains, and then approves them, due to its reelection, the sector XRT could explode.
Probably the best Retail Sales report of the year. Could a turn is next in this sector?





Technically, the price was at a low at $37.46 last week, below the up trendline that acts as a year-support. With all the year ranging (its ADX is below 20) between $40 and $46, now finally the retail sector show some positive feelings that could raise its price, first above its uptrendline support at $40.30, and then above its moving averages (specially the SMA200 at $44) that would be decisive to reaffirm a bullish bias in this ETF. Now its price is recovering due to reports and earnings mentioned above. The bullish signal would be given by the cross in the MACD line. So, after Jackson Hole decisions, an entry long in the short-term in this sector could be a profitable trade.

Charts helps, but I always check first the fundamentals and news before a trade, and this week the FOMC and Jackson Hole are decisive before making any trade. Management risk is the key.

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Today Retail Earnings take pressure off the Fed


When Jackson Hole was becoming an obsession for Wall Street, this week’s retail earnings come to calm the waters and tell the market that the U.S. economy probably isn't cooling as hard and fast as it is believed. It's well known that the Trade War without solution, the inverted yield curve, the fall in the yield of bonds globally (see graph) and, the threat of recession are factors that should scare any economy and regardless, the US consumer sector, key in every economy, seems to flow well. 

Yesterday Home Depot HD was up 4% after good Q2 results reaffirming its guidance for this year. And today, at premarket, Target TGT exploits more than 18% after beat EPS and sales with a wide margin, with raises forecast and reaching all-time highs.The same happen today with Lowe LOW (+ 12%) another great retail chain, beats EPS and sales and affirms guidance. 

The next data of Housing this week can reaffirm this perception of the US economy. Finally the Fed now has less pressure (except Trump's tweets) to lower rates and this can be seen today that the FOMC Minutes begin and Friday with Powell in Jackson Hole.



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JPMorgan: stocks could outperformance into month-end


JPMorgan's Marko Kolanovic said investors are questioning how much of recent equity moves can be attributed to increased recession risk vs. technical flows in this environment of poor liquidity.

JPM's analysts have reasoned that more than half of the recent move in interest rates and inversion of the yield curve was caused by technical drivers (convexity hedging of mortgages, bank portfolios, and variable annuities in poor liquidity conditions) and less than half of the move can be explained by fundamentals such as the growth, inflation, and monetary policy outlook. "This is an important data point for equity investors, as moves in rates (e.g. yield curve inversion) significantly impact investment sentiment," 

Marko wrote, "by looking at various systematic flows in equity markets, we find similar results – i.e. that more than half of equity moves were driven by systematic rather than fundamental trading."Looking at systematic equity flows during (and as a result of) the Wednesday 14th August sell-off, JPMorgan estimates that around USD 75bln of programmatic selling, with around 50% of it coming from index option delta and gamma hedging, around 20% from trend-following strategies, around 15% from volatility targeting strategies, and the remaining 15% from other products (e.g. levered/inverse ETFs, etc.). "While these outflows would have represented about 25% of futures daily volume, in an environment of low liquidity they can be a dominant driver of price action," Marko says, noting that in particular, during August, market depth of S&P 500 futures dropped to near all-time lows. "Within one index point on the S&P 500 (from mid-market), on average there were just around 900 e-mini futures contracts bid/offered – i.e. an approximately USD 130mln sell order could have moved the market by ~1 index point. We estimate that S&P 500 index option hedging flows were likely the single most important driver of price action during both the selloffs and rallies last week.





"What is the current investor positioning, and what type of flows can we expect going forward? "Hedge fund equity beta is currently near all-time lows, in its quarter-percentile. Trend following strategies and volatility targeting strategies also have low exposure, both in their respective 27th percentiles. All else being equal, such low positioning is positive for equity performance going forward," Marko says, adding that "low positioning also reflects negative market sentiment, with the past two readings of the AAII Bull-Bear spread at -22% and -27%, not far from the lows seen in Dec’18 (-28%) and Feb’16 (-29%) that both marked market bottoms."Marko says that equity flows will, to a large extent, be driven by developments around trade, and hence the market will likely continue to be dominated by market disruptive tweets and announcements related to the trade war, which are difficult to foresee. 

On the positive side, Marko says JPM is expecting some stabilization in market volatility as dealers’ gamma positioning is now close to neutral (from a sizable short position last week), and this may reduce volatility and marginally improve liquidity."JPMorgan also expects some marginal stabilization, and perhaps a reversal of volatility targeting outflows. "Given the large outperformance of bonds over equities this month, equity inflows are likely to occur next week," noting that it had recently discussed fixed-weight trigger rebalances may have cushioned the market selloff even before calendar month-end (given the large divergence between stock and bond prices), but typically portfolio rebalances happen at month- or quarter-end, "Marko says that even after the stock market recovered some of the losses from last week, we could still see equity inflows and outperformance into month-end. "Bonds delivered their strongest performance in over seven years and are up around 5% MTD, and equities are down around 2% MTD," adding that as things stand, "this performance divergence leaves fixed-weight portfolios around 2% underweight equities, and suggests they are likely to do a sizeable rotation out of bonds and into equities into month-end."JPM's model suggests that these flows could drive a further 1.5% to 2% of outperformance for equities next week - this figure could change, the bank notes based on this week’s performance of stocks and bonds.

(Taken from JPMorgan strategist, Marko Kolanovic conference call, today )



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