S&P 500 Futures Quiet During Holiday Trading

The S&P 500 has drifted a little bit lower during the Martin Luther King Jr. holiday in the United States, but we are currently hanging about the 50 day EMA, and therefore it makes quite a bit of sense that we do not have anywhere to be. Furthermore, the volume would have been almost nonexistent, so really at this point in time I would not read too much into the daily candlestick. However, I would read quite a bit into the Friday candlestick which suggests that we will continue to have buyers come back into this market.

S&P 500 Video 18.01.22

With all that being said, there are a lot of concerns about the Federal Reserve and what they will end up doing, but at the end of the day it is not a big deal and I think that we simply continue to trade higher based upon the fact that although the Federal Reserve is going to be tightening, the reality is that this is not going to happen overnight, and there are a significant amount of people out there that believe that the Federal Reserve will not be able to tighten as much as people are saying. If that is going to be the case, then a lot of traders are trying to get ahead of the curve and jump in to take advantage of this.

If we broke down below the 4600 level, then it is possible that we could drop to the 4500 level, but there is a bit of an uptrend line in that general vicinity, so I do think that it will hold things up.

For a look at all of today’s economic events, check out our economic calendar.

UnitedHealth to Post Higher 4Q Earnings and Revenue; Target Price $575 in Best Case

The Minnesota-based health insurer UnitedHealth is expected to report its fourth-quarter earnings of $4.31 per share, which represents year-over-year growth of over 70% from $2.52 per share seen in the same period a year ago.

The largest insurance company by Net Premiums would post revenue growth of over 11% to $72.748 billion from $65.47 billion a year ago. It is worth noting that the company has consistently beaten consensus earnings estimates in the last two years.

The company projects adjusted earnings between $18.65 and $18.90 per share for 2021, up from the previous estimate of $18.30 to $18.80, according to ZACKS Research.

UnitedHealth stock closed 0.27% higher at $468.69 on Friday. The stock slumped nearly 7% so far this year after surging more than 43% in 2021.

Analyst Comments

UnitedHealth (UNH) slightly increased 2021 adjusted EPS guidance from $18.30-18.80 to $18.65-18.90 (consensus $18.75), leaving their estimated $1.80 COVID yty EPS headwind unchanged. The implied stub 4Q21 EPS guidance of $4.11-4.36 just bounds consensus $4.34. Expect some elective volumes to flow into the 4th qtr like they saw in September, but this is incorporated in guidance,” noted Gary Taylor, equity analyst at Cowen.

“2022 guidance largely assumes that commercial utilization is fully recovered, government utilization keeps recovering and the cost of any new COVID waves would be offset by increased deferred care and/or antiviral therapeutics. Expects double-digit growth in the VBC business for many years to come. The long-term growth target for UNH is +13-16% per year with 3-5% coming from inorganic acquisitions & share repurchases. 2022 implied growth of +12-15% in 2022 is slightly below LT EPS guidance but still reflects some conservatism for COVID and continued investments in longer-term growth opportunities in VBC, capitation and care delivery. OptumInsight 2022 OI margin is expected to grow to 28.3% at the midpoint from 2021 margin of 27.7%. An overall investment strategy is to find a market need, start small and ultimately grow and scale.”

UnitedHealth Stock Price Forecast

Sixteen analysts who offered stock ratings for UnitedHealth in the last three months forecast the average price in 12 months of $518.13 with a high forecast of $575.00 and a low forecast of $440.00.

The average price target represents a 10.55% change from the last price of $468.69. From those 16 analysts, 13 rated “Buy”, three rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $570 with a high of $850 under a bull scenario and $300 under the worst-case scenario. The investment bank gave an “Overweight” rating on the health care company’s stock.

UnitedHealth Group is the number one Medicare Advantage player with ~28% market share, the number two Medicare PDP player with ~20% market share, and the number two commercial player with ~15% market share. United’s model is enhanced via vertical integration with its OptumRx PBM platform, which is one of the three largest PBMs in the country,” noted Ricky Goldwasser, equity analyst at Morgan Stanley.

“With a large lead in a breadth of services offerings and considerable exposure to government businesses, UnitedHealth is well-positioned for any potential changes in the US healthcare system. A strong balance sheet and continued solid cash generation give flexibility for continued M&A.”

Several other analysts have also updated their stock outlook. Bernstein raised the target price to $564 from $508. Truist Securities lifted the target price to $575 from $520. Credit Suisse upped the target price to $564 from $495.

Technical analysis also suggests it is good to buy as 100-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Check out FX Empire’s earnings calendar

Speculators Rotate Towards Crude Oil and Natgas

A week that saw continued stock market weakness and rising bond, albeit at a much reduced pace after Jerome Powell pledged to do what’s necessary to reduced inflation while at the same time prolonging the economic expansion. The dollar traded weaker ahead of last Wednesday’s, thereby supporting a strong rally in commodities led by energy and industrial metals.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The Bloomberg Commodity Index jumped 2.2% during the reporting week to January 11 with a 6.3% gain in energy and 1.2% in industrial metals offsetting weakness across the agriculture sector which with the exception of coffee and cocoa saw broad losses led by sugar and hogs. Responding to these developments, money managers accumulated fresh longs across the energy sector, not least in crude oil, while cutting back on exposure across all other sectors.

In crude oil, the combined net long in Brent and WTI jumped by the most since November 2020 to reach 538k lots or 538 million barrels, still well below the most recent peak at 737k lots from last June. A US cold blast helped send natural gas up by 14% and the net long up by 30% to 163k lots.

In the other sectors of metals and agriculture, speculators opted to reduce their exposure with the few exceptions being soybeans, cocoa and coffee. Rangebound HG copper as an example saw its net long reduced by 15% to 22.2k lots, primarily due to increased short selling, some of which were probably stopped out during the failed breakout attempt above $4.47 towards the end of last week. Gold and silver both saw net selling , while the platinum short jumped 86%.

In agriculture, speculators increased their long positions in all three soybeans contract, the corn long was cut by 6% while the CBOT wheat short jumped by 40% to an 18-month high. In softs, the sugar long continued to be cut, this time by 61.6k lots to 76.5k lots, and since hitting a cycle peak last August the net long has now been reduced by 72% to a near 18 month low. Cocoa flipped back to a small net long, the coffee long rose 4% while the cotton long was cut by a similar percentage.

Market comments from today’s Market Quick Take:

Crude oil (OILUSFEB22 & OILUKMAR22) trades mixed with Brent crude oil briefly challenging the double-top at $86.75, a seven-year high, before having a rethink as China GDP and retail sales slowed amid ongoing measures to curb the spreading of the omicron variant.

The prompt spreads in WTI and Brent remain elevated at 63 and 74 cents per barrel, thereby signaling rising tightness. Later this week monthly Oil Market Reports from OPEC on Tuesday and IEA on Wednesday will shed some further light on the current situation. Speculators, a little late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months last week.

Copper (COPPERMAR22) slid the most in seven weeks on Friday as weaker-than-expected U.S. economic data (see below) together with weakness in China added to concerns that global growth may slowing amid rising inflation and the spreading virus. High Grade’s drop back below $4.50 triggered some stop loss selling from recently established longs before stabilizing overnight after China, the world’s top consumer, cut rates to support its economy. The worry over tight supplies, however, has not gone away and should cushion any short-term weakness.

Gold (XAUUSD) remains resilient despite Friday’s renewed surge in bond yields as the market continues to price in the prospect of rising US interest rates, potentially at a more aggressive pace than previously expected. Support continues to build in the $1800-area while a break above $1830 could see it target $1850 ahead of the November peak at $1877.

Forex

In forex, the major flow was selling of JPY, where the net short increased by 25.3k lot or the equivalent of $2.7bn. Additional selling of AUD (-2.1k lots) took the net short to a fresh record short at 91.5k lots. The EUR position flipped back to a net long after speculators bought 7.6k lots while the GBP short was reduced by 26%. Overall, the dollar long against ten IMM currency futures and the Doller Index rose by a small 1% to $23.5 billion.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

State Street on Track to Beat Earnings Estimates Again; Target Price $132 in Best Case

The Boston-based financial services and bank holding company State Street is expected to report its fourth-quarter earnings of $1.93 per share, which represents a year-on-year growth of just over 14% from $1.69 per share seen in the same period a year ago.

The second oldest bank in the United States would post revenue growth of over 3% to $3.007 billion from $2.92 billion a year ago. It is worth noting that the company has consistently beaten consensus earnings estimates in the last two years.

According to ZACKS Research, in the fourth quarter, net interest income is expected to range from $475 million to $490 million. As a result of a small rebound in short end-market rates and some movement at the longer end of the curve, this represents a notable improvement over earlier guidance of $460-470 million. Management expects earnings per share to grow between 10-15% and ROE to reach 12-15% in the medium term. Total payout ratios are expected to exceed 80%.

State Street stock closed 0.319% higher at $103.77 on Friday. The stock rose nearly 12% so far this year after surging more than 27% in 2021.

Analyst Comments

“Overweight on valuation, as we think State Street (STT) should trade at 12x 2023 PE or 1.6x PB given our expectation for a 14% ROE in 2023. The current valuation of 1.2x PB implies a 12% cost of equity on a relatively low-risk stock, too high in our opinion. We think STT should trade with an 8% cost of equity, more similar to BK and NTRS,” noted Betsy Graseck, equity analyst at Morgan Stanley.

STT is one of the most rate-sensitive names in our coverage. That’s particularly true on the short end, as a 50bp increase in front end rates increases EPS by 9%. STT is laser-focused on driving efficiencies and delivering operating leverage, even in an inflationary environment.”

State Street Stock Price Forecast

Thirteen analysts who offered stock ratings for State Street in the last three months forecast the average price in 12 months of $115.92 with a high forecast of $132.00 and a low forecast of $99.00.

The average price target represents an 11.71% change from the last price of $103.77. From those 13 analysts, nine rated “Buy”, four rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $700 with a high of $900 under a bull scenario and $440 under the worst-case scenario. The firm gave an “Overweight” rating on the company’s stock.

Several other analysts have also updated their stock outlook. Deutsche Bank lowered the target price to $132 from $133. UBS raised the target price to $119 from $116. Citigroup lifted the price target to $120 from $115. JPMorgan upped the target price to $110 from $107.50.

Technical analysis also suggests it is good to buy as 100-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Check out FX Empire’s earnings calendar

Will Inflation Hit the Markets?

With US inflation at a 40-year high, in this week’s market update XTB’s market analyst Przemysław Kwiecień examines what this could mean for stocks, commodities and forex, the impact this will have on investors, and how the Fed might react. Expect to find answers to questions such as:

  • What does elevated inflation mean for stocks and commodities?
  • Are investors unprepared for monetary tightening?
  • What is the key data and levels for the pound this week?

Don’s miss our latest market update: Watch now!

For a look at all of today’s economic events, check out our economic calendar.

Coinbase Stock is Wall Street’s Opportunity to Embrace Crypto’s Volatile Price Rallies

But with such a strong relationship with the volatile world of cryptocurrency, this is perhaps seen as a perk by investors looking to cash in on the famous price rallies of major crypto assets.

As an example of the price movements of COIN on the Nasdaq, the stock is currently down some 13% on its listing price, but within two months of its debut COIN was down 32% following a cryptocurrency market crash throughout Q2 of 2021. The recent market upturn paved the way for a 59% rally on the stock between late September and early November before its value embarked on a 20% dip over the course of the past month.

Such erratic behavior would typically scare away many stock market investors, but wild 20% and 30% price swings are part and parcel of cryptocurrency investing.

Significantly, Coinbase’s price movements trace, rather accurately, the path taken by Bitcoin since its Nasdaq debut on April 14th 2021. Although the price drop of COIN in recent weeks has been more pronounced as rising inflation rates have seen more tech stock sell-offs across Wall Street.

“Coinbase’s recent growth is primarily due to the bitcoin rally, as the assets are pretty solidly correlated with each other, while the company also has additional growth drivers,” explained Maxim Manturov, head of investment research at Freedom Finance Europe.

“First and foremost, it is worth noting that Coinbase has officially launched its Prime service for all the institutions to make Coinbase the most versatile platform for institutional investors. Coinbase Prime combines cutting-edge technology within a single solution to allow more assets to be traded,” Manturov added.

Manturov’s words indicate that Coinbase could become more than just a Wall Street-based mirror to Bitcoin. In improving its own business model whilst growing alongside the cryptocurrency market, COIN may be a stock that can offer significant levels of growth for investors.

The Lure of Cash Flow

Despite Q3 of 2021 being down from that of 2020, which hosted the early stages of a crypto market bull run that rallied for around seven months, Coinbase still managed to generate more than $300 million in free cash flow. This must be regarded as a huge sum of money for what may be described as an underwhelming quarter for cryptocurrencies.

The fact that Coinbase is accustomed to huge cash flows as a relatively young company means that there’s huge potential for transactions and revenue growth over the long term. Of course, these insights are still part of an extremely small sample size, and investors should expect wild volatility to remain – but given that the company is still generating cash whilst other new companies generally take many years to even project positive cash flows needs to be taken into account when looking at COIN’s prospects.

It’s this hefty cash flow that can deliver great potential for investors and users of the platform alike. The money being made can and is being pumped back into the business model to leverage better products and innovative services – with Coinbase’s upcoming NFT marketplace set to become a big part of the company’s future.

Innovating into NFTs

Significantly, Coinbase is soon set to launch its own NFT marketplace on its network. The upcoming feature already has a 2.5 million-strong mailing list in which users have opted to sign up to receive updates. According to some within the company, there’s the widespread belief that Coinbase’s NFT marketplace may grow to become even bigger for the company than cryptocurrency trading.

NFTs, on non-fungible tokens, are new to the cryptocurrency ecosystem and have grown significantly in terms of popularity. Through the release of its own platform, Coinbase could offer users swift and frictionless services for users to buy, sell, and create their own NFT artwork of collectables.

Although there are already functioning NFT marketplaces online, there’s certainly space for Coinbase to build a product to emerge as a market leader. As the world’s most popular cryptocurrency platform, Coinbase’s accommodation of NFTs could act as a catalyst for the company, positively impacting its bottom line.

Unique features like enabling users to showcase their NFTs on the platform and allowing other users to follow different creator profiles is likely to build a more social foundation for Coinbase too.

Could Coinbase be a Buying Opportunity for Investors?

It’s essential to caveat any predictions regarding the future of cryptocurrency assets by noting that the extreme volatility of the ecosystem means that nothing is certain, and that the rate of evolution is so fast that the technology within cryptocurrency is regularly outpacing itself. This means that COIN could easily find itself adversely impacted by a mass sell-off, or face unexpected challenges from newer tech.

However, Coinbase is also a leading cryptocurrency exchange that’s not only traced the recent rallies of Bitcoin, but boasts the rate of cashflow to evolve as a business whilst the crypto landscape continues to grow.

With this in mind, if you’re an investor who’s bullish about the future role that cryptocurrency can play in finance, Coinbase makes sense as a strong growth stock to add to your portfolio.

European Equities: Economic Data from China to Set the Tone ahead of the European Open

Economic Calendar

Monday, 17th January

Italy CPI (MoM) (Dec) Final

Tuesday, 18th January

German ZEW Current Conditions (Jan)

German ZEW Economic Sentiment (Jan)

Eurozone ZEW Economic Sentiment (Jan)

Wednesday, 19th January

German CPI (MoM) (Dec) Final

Thursday, 20th January

German PPI (MoM) (Dec)

Eurozone Core CPI (YoY) (Dec) Final

Eurozone CPI (YoY) (Dec) Final

Eurozone CPI (MoM) (Dec) Final

The Majors

It was a bearish end to the week for the European majors on Friday. The EuroStoxx600 slid by 1.01%, with the CAC40 and the DAX30 ending the day with losses of 0.81% and by 0.93% respectively.

Following some particularly hawkish chatter from FOMC members on Thursday, disappointing economic data from the Eurozone and the U.S weighed. Adding to the bearish mood was a negative outlook from JPMorgan Chase. Corporate earnings results from the U.S. Citi, JPMorgan Chase, and Wells Fargo were due out on the day.

Ahead of the European open, economic data from China had been upbeat but not enough to support the majors throughout the session.

In December, China’s USD trade surplus widened from $71.71bn to $94.46bn, with exports up 20.9% year-on-year.

The Stats

It was a busier day on the Eurozone economic calendar. Finalized inflation figures for France and Spain were in focus along with trade data for the Eurozone.

French inflation

France’s annual rate of inflation held steady at 2.8% in December, which was in line with prelim figures.

Month-on-month, consumer prices increased by 0.2% after having risen by 0.4% in November, which was in line with prelim figures.

According to Insee.fr,

  • Energy prices fell by 0.9%, month-on-month, after having risen by 1.5% in November.
  • The prices of services were up 0.4% versus 0.2% in November and food prices were up 0.5% versus 0.4% in the month prior.
  • Year-on-year, core inflation was up 2.0%, however, which was up from 1.7% in November.
    • Prices for manufactured goods were up 1.2% versus 0.8% in November.
    • Food prices rose by 1.4% after a 0.5% in November.

Spanish Inflation

Spain’s annual rate of inflation accelerated from 5.5% to 6.5%, which was down from a prelim 6.7%.

Eurozone Trade

In November, the Eurozone’s goods trade balance narrowed from €3.3bn surplus to €1.5bn deficit versus a forecasted €7.6bn surplus.

According to Eurostat,

  • Euro area exports of goods to the rest of the world increased by 14.4% to €225.1bn, compared with Nov-2020.
  • Imports from the rest of the world were up 32% to €226.6bn, compared with Nov-2020.
  • The rise in imports was as a result of an increase in the value of energy imports.
  • In Nov-2020, the Eurozone had a €25bn surplus.
  • The last time the Eurozone recorded a deficit was in Jan-2014.
  • Intra-euro area trade rose to €204.3bn in Nov-2021, up by 22.1% compared with Nov-2020.

From the U.S

Retail sales and consumer sentiment figures were the key U.S stats of the day, with the stats skewed to the negative.

In December, U.S core retail sales slid by 2.3% versus a forecasted 0.2% rise. Core retail sales had risen by just 0.1% in November. Retail sales fell by 1.9% versus a forecasted 0.1% decline. In November, retail sales had risen by 0.2%.

According to prelim figures, the Michigan Consumer Sentiment Index fell from 70.6 to 68.8% in January. Economists had forecast a fall to 70.0. The Consumer Expectations Index slid from 68.3 to 65.9.

The Market Movers

For the DAX: It was a mixed day for the auto sector on Friday. Continental and Daimler fell by 0.14% and by 0.85% respectively. BMW and Volkswagen ended the day up by 0.30% and by 1.60% respectively.

It was a bearish day for the banks, however. Deutsche Bank and Commerzbank fell by 2.02% and by 1.51% respectively.

From the CAC, it was also a bearish day for the banks. Soc Gen slipped by 0.03%, with Credit Agricole and BNP Paribas seeing losses of 0.86% and 0.99% respectively.

The French auto sector had a bearish session. Stellantis NV and Renault ended the day down by 0.19% and by 1.00% respectively.

Air France-KLM fell by 1.49%, while Airbus SE ended the day up by 0.03%.

On the VIX Index

It was back into the red for the VIX on Friday, marking a 3rd loss of the week.

Partially reversing a 15.27% surge from Thursday, the VIX fell by 5.51% to end the day at 19.19.

The Dow fell by 0.56%, while the NASDAQ and the S&P500 saw gains of 0.59% and 0.08% respectively.

VIX 170122 Daily Chart

The Day Ahead

It’s a relatively quiet day ahead on the Eurozone’s economic calendar. Finalized December inflation figures from Italy will be in focus. Barring any marked revisions from prelim figures, however, the stats should have a muted impact on the majors.

Ahead of the European open, 4th quarter GDP numbers from China will set the tone. Other stats from China later this morning will include fixed asset investment, industrial production, and retail sales figures. Expect some interest in the industrial production figures.

With the U.S markets closed today, there are no stats from the U.S to influence late in the European session.

Relative Strength Chart Reveals Nasdaq Is Losing Its 20 Years of Leadership

After the burst of the dot-com bubble in early 2000 as shown in the monthly ratio chart (IXIC/SPX) between Nasdaq Composite (IXIC) and S&P 500 (SPX), Nasdaq was underperformed S&P 500 until the swing low formed in 2002. Refer to the relative strength chart (IXIC/SPX) below:

Relative Strength Between Nasdaq & S&P 500

Despite IXIC/SPX is a ratio chart, Wyckoff price structure together with Wyckoff events can be observed throughout. After the selling climax (SC) formed in April 2001 as reflected in the huge bearish price spread with acceleration to the downside, an automatic rally stopped the downtrend and into a trading range.

After a secondary test in September 2002, a sign of strength rally (SOS), which is classified as the best rally within the trading range broke above the resistance followed by a shallow backup action (BU) trading range until 2009. This is a classical Wyckoff accumulation structure pending the start of the markup phase, which is the beginning of the uptrend.

Nasdaq composite started to lead the S&P 500 since 2002 as it formed a higher high and a higher low subsequently.

The uptrend manifested after a breakout from the backup trading range in 2009 and accelerated in 2014-2018. After the COVID-19’s bottom in March 2020, there was a potential final speculative run up forming a buying climax (BC) in February 2021, barely touch the swing high formed in 2000, which acted as a resistance.

Next, a change of character, which is the largest down wave (as highlighted in orange) since the bottom in 2002 kicked in followed by an inability to rally up (as highlighted in blue) between May to November 2021, suggested more weakness ahead in Nasdaq Composite against S&P 500.

Should the relative strength chart (IXIC/SPX) break below the support (as annotated in horizontal brown line), it is likely to head down to test the lower support (as annotated in horizontal green line).

This could be a market rotation scenario as shown in my video last week or it could mean Nasdaq will drop more than S&P 500 should a market correction begin. Either way, Nasdaq Composite is expected to underperform S&P 500 and losing its 20-years of leadership since 2002 based on the relative chart (IXIC/SPX).

Price Target for IXIC/SPX with Point & Figure Chart

As relative strength chart is still unfolding and the support is not broken yet, it is still possible for the price to bounce up to higher target. Point and Figure (P&F) chart is a tool in price action trading with Wyckoff Method as traders can project the price target based on the causes built according to the Wyckoff’s Law – Cause and Effect. Let’s examine if there is enough fuel in the tank for the price to go higher in this relative strength chart.

As shown in the point and figure chart above, the original segment (in blue) was used in the calculation. The price targets based on the blue segment, which is the accumulation structure, are 3.5-3.75. The next segment (in orange) based on the re-accumulation structure, works out to be 3.45-3.65, which acted as a confirming count to the original segment.

The price targets from these two segments coincide with the resistance at 3.6 as formed by the previous high during the internet dot-com bubble in 2000. The fuel in the tank for the upside price target has been consumed as confirmed by the pullback in February 2021 once it hit the price targets.

It is crucial to pay attention to the next price action to confirm if the support will be broken with more weakness ahead or another trading range will be formed from here on to build up more causes for the next up move.

Fed Ramps Up Hawkish Talk; Tech Sells Off, Dip-buyers Return

Normally FOMC meeting minutes are somewhat of a non-event as the major insights tend to be communicated during the post-meeting press conference. However, this year we’ve had at least two occasions when the release of the minutes has spooked markets into a risk-off mood.

Yields up, stocks down

A combination of soft PMI data, down to 58.7 in December from 61.1 in November, along with a contraction in JOLTS job openings, caused US markets to sell off on Tuesday, January 4. This set the stage for a more pronounced rout on Wednesday when the minutes were released.

image1.png

The bond market sold off, which had the effect of spooking tech stocks, particularly as 10-year yields rose to 1.764% for the first time since March of last year. Crypto also took a significant hit; the broad market was down by around 6% on the day as investors with paper profits from 2021 begin to weigh how slowing growth and a more hawkish Fed are likely to dampen the enthusiasm for risk assets.

The S&P 500 was down over 1.8% on the day. The Nasdaq 100 fell by around 2.7%, and the Russell 2000 dropped by more than 3.3%.

Sector rotation?

A great deal has been made recently about the fact that the percentage of Nasdaq 100 stocks that are down by 50% or more from their 52-week highs is almost at record highs. We haven’t seen a situation when so many of the index’s stocks are down despite it trading close to highs since the dot-com bubble of 2000.

The best performing sectors in the first week of January, following the selloff, were Financials and Energy, up 7% and 4% on the week, respectively. This has caused many to speculate about a broader sector rotation. Whether this proves to be the case or not, you can see the market’s concerns present in this mini rotation. Financials are set to perform well in an environment of rising rates. Also, with inflation concerns still front and centre, and the worst of the winter still not over with, energy seems like a smart bet for many investors.

image2.png

Tech did not actually lead the selloff. Home construction was the worst-performing US sector last week, down 7.8%. Tech was down 3.8% and real estate down 3.3% on the week.

Dip buyers return on Monday

Monday, January 10, saw a substantial gap down across all major US markets on opening. Dip buyers returned en masse to prevent the Nasdaq 100 from enduring a fifth consecutive session of losses. The rally was larger than any such rebound since the depths of the coronavirus crash back in March of 2020. The move would see the Nasdaq 100 alone trading incrementally higher at Monday’s close than it did on Friday’s.

What the minutes said and why it’s a big deal

The offending comments from these particular Fed minutes went as follows:

“…it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.”

Why was this such a big deal? Because up until now all the talk has been around tapering existing asset purchases and getting to a point where the Federal Reserve can begin to start raising interest rates. These minutes go further than the taper that’s currently underway, or the raising of rates at a faster pace (which the Fed has previously signalled).

December’s minutes suggest that the Federal Reserve is considering putting an end to quantitative easing and replacing it with quantitative tightening (active reduction of the balance sheet). When QE (which is by definition accommodative) goes away, financial conditions necessarily tighten and it’s the prospect of this tightening that financial markets are reacting to.

But it’s more than just that. The famous taper tantrum of 2018 took place as the Federal Reserve was reducing the balance sheet (quantitative tightening) at the same time as raising interest rates. Back then, Powell managed to get the Fed funds rate up to 2.5% before a 20% drawdown in US equity markets caused him to pivot. It’s this combination of balance sheet reduction and interest rate hikes that markets are reacting to.

Data to look out for this week

Wednesday’s upcoming CPI reading should hopefully provide more clarity where inflation is concerned. Also, be sure to keep an eye on the EIA’s crude oil inventory report on the same day, and US initial jobless claims on Thursday.

Final thoughts

The question is how much tightening can equity markets tolerate and where will inflation be once this level is reached? Remember, stocks can rise with a tightening Fed as long as growth levels are maintained. Company earnings will be a key factor to watch this week, as any sharp revisions in growth expectations will get investors’ attention and could result in a further slide for stocks.

Tech, energy and financials stocks, indices such as Nasdaq100 and S&P500, as well as other instruments in forex, commodities and other asset classes are all available to trade with HYCM.

by Giles Coghlan, Chief Currency Analyst, HYCM

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Wall Street Week Ahead Earnings: Goldman Sachs, Procter & Gamble, United Airlines, and Netflix in focus

The following is a list of earnings slated for release January 17-21, along with a few previews. A number of big companies will report earnings in the week ahead, including Goldman Sachs and Bank of America, Procter & Gamble, Netflix, and a number of transportation companies. Investors will carefully monitor the latest news on the rapidly spreading Omicron coronavirus variant to see how it affects earnings in 2022.

Earnings Calendar For The Week Of January 17

Monday (January 17)

No major earnings are scheduled for release. The stock market in the U.S. will be closed in observance of Martin Luther King, Jr. Day.

Tuesday (January 18)

IN THE SPOTLIGHT: GOLDMAN SACHS

The New York-based leading global investment bank Goldman Sachs is expected to report its fourth-quarter earnings of $11.89 per share, which represents a year-over-year decline of about 2% from $12.08 per share seen in the same period a year ago.

The world’s leading investment manager would see a decline in revenue of nearly 1% to $11.65 billion from a year ago. It is worth noting that in the last two years, Goldman Sachs has surpassed market consensus expectations for profit and revenue most of the time.

“We expect Goldman Sachs to report mixed results, with revenues outperforming the consensus estimates and earnings missing the expected figure. The investment bank reported better than expected results in the last quarter, with the top-line increasing 26% y-o-y. This was driven by significant growth in the investment banking business, followed by higher global markets and consumer & wealth management revenues,” noted analysts at TREFIS.

“While investment banking grew on the back of growth in mergers &acquisitions (M&A) and equity underwriting deal volumes, global markets benefited from higher equity trading revenues. Similarly, the consumer & wealth management segment gained from an increase in outstanding loan balances. That said, the top-line was partially offset by negative growth in the asset management division, primarily due to lower equity investment revenues. We expect the same trend to continue in the fourth quarter. We estimate Goldman Sachs’ valuation to be around $447 per share which is 14% above the current market price.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE JANUARY 18

TICKER COMPANY EPS FORECAST
BAC Bank of America $0.78
SCHW Charles Schwab $0.83
CNXC Concentrix $2.54
HWC Hancock Whitney $1.33
IBKR Interactive Brokers $0.74
JBHT J.B. Hunt Transport Services $2.0
MBWM Mercantile Bank $0.85
ONB Old National Bancorp $0.38
PNFP Pinnacle Financial Partners $1.56
PNC PNC Financial Services $3.62
PRGS Progress Software $0.62
SBNY Signature Bank $3.92
TFC Truist Financial $1.27
UCBI United Community Banks $0.63

 

Wednesday (January 19)

IN THE SPOTLIGHT: PROCTER & GAMBLE, UNITED AIRLINES

PROCTER & GAMBLE: The world’s largest maker of consumer-packaged goods, is expected to report its fiscal second-quarter earnings of $1.66 per share, which represents year-on-year growth of just over 1% from $1.64 per share seen in the same period a year ago.

The Cincinnati, Ohio-based consumer goods corporation would post revenue growth of over 3% to $20.4 billion from a year ago. It is worth noting that the company has consistently beaten consensus earnings estimates in the last two years, at least.

“We believe strategy changes can sustain Procter & Gamble (PG) LT topline growth in the 4% range. In the US, a strong breadth of performance and share gains give us confidence that market share momentum is sustainable and supports LT topline growth above HPC peers. While near-term pressures from commodity/freight inflation will impact margins, we believe PG has stronger pricing power than peers, particularly with share gains,” noted Dara Mohsenian, equity analyst at Morgan Stanley.

PG trades at ~22.5x CY22e EPS, an HSD% discount to HPC peers CLX, CL and CHD, and looks compelling given our call for higher LT PG growth.”

UNITED AIRLINES: The major U.S. airline company is expected to report a loss for the eight-consecutive time of $-2.12 in the holiday quarter as the aviation service provider continues to be negatively impacted by the ongoing COVID-19 pandemic and travel restrictions.

However, that would represent a year-over-year improvement of about 70% from -$7.0 per share seen in the same period a year ago. The Chicago, Illinois-based airlines would post revenue growth of over 130% to $7.94 billion.

“Despite some headwinds around staffing issues, we expect United Airlines (UAL) to guide to a continued sequential improvement with capacity guided to be down in the 17-18% range in Q1, which incorporates domestic capacity down in the 1% range, while international capacity remains down 27%,” noted Sheila Kahyaoglu, equity analyst at Jefferies.

“Remaining in a Net Loss Position into Q1. We expect a continued sequential decline in CASM-ex to 11.63¢, which reflect a 9% increase vs. 2019 levels, which compares to the 13% increase we expect in Q4. Nonetheless, UAL will remain in a net loss position in Q1, before turning positive in Q2.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE JANUARY 19

TICKER COMPANY EPS FORECAST
AA Alcoa $2.5
ASML ASML Holding $4.3
CFG Citizens Financial Group $1.16
CMA Comerica $1.6
DFS Discover Financial Services $3.48
FAST Fastenal $0.36
FUL H.B. Fuller $1.06
KMI Kinder Morgan $0.27
MS Morgan Stanley $1.83
PACW PacWest Bancorp $1.06
PG Procter & Gamble $1.66
STT State Street $1.93
USB U.S. Bancorp $1.13
UAL United Airlines $-2.12
WTFC Wintrust Financial $1.56

 

Thursday (January 20)

IN THE SPOTLIGHT: NETFLIX

The California-based global internet entertainment service company NetFlix is expected to report its fourth-quarter earnings of $0.82 per share, which represents a year-over-year decline of over 30% from $1.19 per share seen in the same period a year ago.

However, the streaming video pioneer would post revenue growth of over 16% to $7.71 billion. It is worth noting that the company has beaten earnings per share (EPS) estimates just thrice in the last two years.

“We believe share performance is highly dependent on increasing global membership scale. Proven success in the US and initial international markets provides a roadmap to success in emerging markets, and scale should allow Netflix (NFLX) to leverage content investments and drive margins,” noted Benjamin Swinburne, equity analyst at Morgan Stanley.

“Higher global broadband penetration should increase the Netflix (NFLX) addressable market, driving member growth and providing further opportunity given NFLX’s global presence. Longer-term, we see the ability to drive ARPU growth, particularly given increased original programming traction.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE JANUARY 20

TICKER COMPANY EPS FORECAST
AAL American Airlines $-1.72
CSX CSX $0.42
FITB Fifth Third $0.91
ISRG Intuitive Surgical $1.01
KEY KeyCorp $0.56
MTB M&T Bank $3.24
NTRS Northern Trust $1.82
OZK Bank OZK $0.98
PPBI Pacific Premier Bancorp $0.85
PPG PPG Industries $1.2
RF Regions Financial $0.49
SASR Sandy Spring Bancorp $1.1
SIVB SVB Financial $6.29
TRV Travelers $3.77
UNP Union Pacific $2.66
WBS Webster Financial $1.11

 

Friday (January 21)

TICKER COMPANY EPS FORECAST
ALLY Ally Financial $2.0
FHB First Hawaiian $0.47
HBAN Huntington Bancshares $0.37
INFO IHS Markit $0.71
SLB Schlumberger $0.39

 

European Equities: A Week in Review – 14/01/22

The Majors

It was a bearish week for the European majors in the week ending 14th January.

The DAX30 slipped by 0.40%, with both the CAC40 and EuroStoxx600 the ending the week down by 1.05% respectively.

It was a choppy week for the global equity markets, with market sentiment towards FED monetary policy the key driver in the week.

Early in the week, FED Chair Powell testimony had pointed to just 3 rate hikes for the year to curb inflationary pressure. December inflation figures from the U.S on Wednesday, however, left FOMC hawks to take a more hawkish stance later in the week.

A number of FOMC members talked of the need for 4 rate hikes, leading to a tech sell-off late in the U.S session on Thursday. The negative sentiment filtered through to the European majors on Friday, leaving the majors in the red for the week.

Economic data from the Eurozone largely took a back seat in the week.

The Stats

Key stats included Eurozone unemployment, industrial production, and trade data for November.

The stats were skewed to the positive. The Eurozone’s unemployment rate fell from 7.3% to 7.2%, with industrial production up 2.3% in the month. Production had fallen by 1.3% in October.

Trade data was market negative, however, while finalized inflation figures for France and Spain had a muted impact on the majors. The Eurozone’s trade balance narrowed from a €3.3bn surplus to a €1.5bn deficit in November. It was the Eurozone’s first goods trade deficit since January 2014.

From the ECB, the Economic Bulletin sent mixed signals, while suggesting that inflation was more than just transitory.

From the U.S

It was a big week for the Dollar. In the first half of the week, FED Chair Powell testimony and December inflation figures were key drivers.

While the FED Chair talked of the need to hike rates, there was no mention of the need for more than 3 this year. This was taken as a positive for the riskier assets and negative for the Dollar.

On Wednesday, another spike in inflation failed to spook the markets. This was in spite of the U.S annual rate of inflation at its highest since 1982. An easing in energy prices for the first time since the uptrend was taken as a sign of a possible topping out.

Jobless claims failed to impress on Thursday, with initial jobless claims increasing from 207k to 230k in the week ending 7th January.

Retail sales figures for December wrapped things up on Friday. In December, retail sales fell by 1.9% versus a forecasted 0.1% decline. Core retail sales tumbled by 2.3% versus a forecasted 0.2% rise.

The Market Movers

From the DAX, it was a mixed week for the auto sector. BMW and Volkswagen rallied by 3.89% and by 2.86% respectively to lead the way, with Daimler rising by 1.67%. Continental bucked the trend, however, with a 0.04% loss.

It was a bearish week for the banking sector. Deutsche Bank and Commerzbank slid by 3.33% and by 5.47% respectively.

From the CAC, it was a bullish week for the banks. Soc Gen rallied by 3.13%, with BNP Paribas and Credit Agricole ending the week with gains of 2.79% and 2.38% respectively.

The French auto sector also had a bullish week. Stellantis NV and Renault rallied by 5.43% and by 4.03% respectively.

Air France-KLM ended the week down by 1.65%, with Airbus falling by 0.31%.

On the VIX Index

It was a 2nd consecutive week the green for the VIX in the week ending 14th January, marking a 6th rise in 9-weeks.

Following an 8.94% gain from the previous week, the VIX rose by 2.29% to end the week at 19.18.

2-days in the green from 5 sessions, which included a FOMC member driven 15.28% jump on Thursday, delivered the upside.

For the week, the Dow fell by 0.88%, with the NASDAQ and the S&P500 ending the week down by 0.28% and by 0.30% respectively.

VIX 150122 Weekly Chart

The Week Ahead

It’s quieter week ahead on the Eurozone economic calendar. Early in the week, ZEW Economic Sentiment figures for Germany and the Eurozone will be in focus. We’ve seen plenty of sensitivity to the numbers of late.

The focus will then shift to finalized inflation figures for member states and the Eurozone and Eurozone consumer confidence figures.

On the monetary policy front, the ECB monetary policy meeting minutes will also draw plenty of interest. The markets are expecting to see a shift in stance on interest rates to curb inflation.

From the U.S, Philly FED Manufacturing and weekly jobless claims figures will be the key stats of the week. Expect another jump in jobless claims to test support for riskier assets…

Ahead of the European open on Monday, economic data from China will set the tone, however, 4th Quarter GDP numbers, along with industrial production and retail sales figures for December will be key.

Away from the Economic Calendar

News updates on COVID-19 will need continued monitoring. While the markets have accepted the less severe Omicron strain, any news of a new strain would weigh on the majors. There are also corporate earnings to draw attention in the week.

Gold Has Gained Value During 4 of the Last 5 Weeks

Gold daily chart

Gold continues to trade in a range-bound manner, but over the last five weeks, gold prices have gained value during four of those weeks. Although gold has traded lower yesterday and today, ending the week with a moderate gain of 0.6%. For the most part, we have seen gold trade through the eyes of the weekly chart with a succession of higher lows. What has been lacking is a series of higher highs based upon the high achieved in June 2022 when gold topped out at $1920.

KGX Index

U.S. equities had mild to moderate gains, with both the Standard & Poor’s 500 and the NASDAQ composite closing higher on the day. However, the Dow Jones industrial average did close lower by 0.56%.

For the most part, market participants and analysts have factored in a much more aggressive Federal Reserve with the anticipation of three or four interest rate hikes this year. The current assumption based on information released from the Federal Reserve is that each rate hike will be ¼%. That means that if they move forward with this more aggressive monetary policy, they will raise rates only 1% this entire year which would take the Fed fund rate from its current fix of zero to ¼%. This means that by the end of 2022 fed funds rate would be fixed between 1% and 1 ¼%.

With recently released data in regards to current inflationary pressures, the Bureau of Economic Statistics has confirmed what analysts and Americans have known for quite some time, and that is that inflationary pressures continue to spiral to higher levels with the CPI (consumer price index) now fixed at 7% in December year over year.

This brings us to the current dilemma faced by the Federal Reserve. The Federal Reserve’s more hawkish or aggressive monetary policy cannot curtail the current rise of inflationary pressures to any great degree. Many analysts, including myself, acknowledge that the Federal Reserve’s Monetary Policy as it stands with a more hawkish demeanor cannot have any dramatic effect on the cost of goods and services by themselves. Any real hope of seeing inflationary pressures diminish must be accomplished through a combination of actions by the administration as well as the monetary policy of the Federal Reserve.

As the data has clearly illustrated, the current level of inflation is based upon the high pent-up demand during the first year and ½ of the recession which in essence began in March 2020. As we approach the second anniversary of the onset of the recession, which is a direct result of a global pandemic in many ways, we are much closer to understanding the new Covid-19 virus.

However, that understanding has indicated that we are far from having any real handle on eradicating the virus. What is happening is that the virus has had a global impact as new waves created by mutations or variants of the original virus strain continue to wreak havoc on economies worldwide. It seems as though the question of what a new normal will look like at the end of the pandemic contains the real possibility that there will not be a conclusion or a point in time when the Covid-19 virus simply does not exist. Rather it is beginning to seem likely that global citizens health organizations and countries will learn more effective measures to deal with the rapid spreading of variants as they emerge.

This might mean that we are currently experiencing the new “normal,” and life, as we know it from the pre-pandemic days, will never completely return. As such people will continue their daily lives with this issue and learn to adapt to it.

Wishing you as always good trading and good health,

For those who would like more information simply use this link.

Gary S. Wagner

 

US Federal Reserve – Playing With Fire Part II

Throughout the last few weeks of 2021 and early 2022, these comments and posturing by the US Fed have created some very big downside price moves in the US major indexes. As a result, the US markets’ volatility levels (VIX) have moved to a recent average between 17~21 – nearly 3x historical normal levels.

US Fed Likely To Move Very Slowly On Rates

One thing that I believe has become evident to many people is that we have moved past the COVID stimulus conversations of the past 24+ months. Inflation, rising prices, constricted supply-chains, and an excess of capital throughout many global markets appear to have shifted how the US Fed interprets future risks. The Fed is telegraphing these concerns to investors very clearly right now, which means traders/investors are shifting their focus away from high-flying Growth stocks.

Even though traders are attempting to shift capital away from certain risky sectors in the US and global markets, I still believe we have about 60 to 120+ days before the bigger market shift takes place.

The US Federal Reserve will likely start addressing inflationary concerns by reducing their balance sheet assets – not by aggressively raising interest rates. I feel the US Fed will navigate Q1:2022 and Q2:2022 by reducing balance sheet assets while allowing the global supply-chain issues to attempt to resolve themselves. By June/July 2022, or later, I believe the Fed may start to consider rate increases as a means to slow inflation.

Fed Comments Shift Investor Sentiment – Metals In Focus For Later 2022

This move away from Dovish/easy-money policies will push traders to consider more traditional hedge investments – like Gold and Silver. I’m sure you’ve read some comments over the past 24+ months about Gold being an extremely undervalued asset as the US Fed poured trillions of stimulus dollars into the economy? These comments were made concerning the fact that Gold rallied from $1450 in 2019 to almost $2100 in 2020 – over 12 months (over +43%). Could a big move in Gold/Silver happen again in 2022 or 2023?

My research suggests a Double Pennant/Flag formation in Gold suggests the $1675 support level becomes critical soon. It also indicates a Breakout/Breakdown move may start to happen before March or April 2022 – near the APEX of the current Pennant/Flag formation.

The key APEX range is currently between $1785 and $1830. This represents a very tight price range where Gold may attempt to consolidate as we move towards the March/April Apex. My research suggests a move to levels near $1740 to $1750 may happen just before the Apex Breakout/Breakdown initiates. So, watch for a bit of downside price volatility in Gold before the end of February 2022.

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Junior Gold Miners May Rally +45%, Or More, On A Gold Price Rally

The Junior Gold Miners (GDXJ) Weekly Chart shows a firm support level near $37.35 that should act as a floor for price. My research suggests the next 45+ days will see GDXJ prices stay below $44 to $45 – trading in a reasonably tight range before starting to rally higher near the end of February 2022.

I believe Metals and Miners are aligning for a late February 2022 or Q2:2022 rally. The reason is that I believe the positioning by the US Fed, and expectations related to later 2022 (a mid-term election year), may prompt quite a bit of concern for the US and global equities. This will likely push investors and traders into “old-school” hedge instruments – like Gold and Silver.

That means Junior Gold and Silver Miners maybe about 55+ days away from an explosive upside price trend.

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SILJ May Rally +70% to +100%, Or More, On Fed Actions

Near the end of 2022, I published a research article highlighting the incredible opportunity in Silver – focusing on how the Gold/Silver ratio had recently reached another peak level and had started to decline: Fear May Drive Silver More Than 60% Higher In 2022. This move suggests the disparity between the price of Gold to the price of Silver shows Gold is appreciated (and holding greater value) than Silver over the past few years.

The COVID virus event, and the subsequent Fed/Government stimulus, shifted investors/traders focus away from precious metals and into the equities market speculative rally. Now that the US Fed is starting to warn of more aggressive rate increases and other actions, precious metals are suddenly much more important as a hedge against future risks.

This SILJ Weekly Chart highlights the incredible base level, near $12, that continues to offer traders a fantastic hedge against a sudden Fed move. Using a simple Fibonacci Price Extension, we can see a $20 target level (+61%) and a $25.64 target level (100%). If the $12 level holds as a base/support, SILJ may be one of the easiest and best hedges against a sudden Fed move right now.

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The US Federal Reserve is, in my opinion, playing with fire

The COVID Virus Event pushed global debt levels higher by more than $19.5 Trillion Dollars (Source: Bloomberg ). The rush to attempt to save the global economy has created a massive surge in global debt levels – pushing the global debt to GDP level to well above 356% (Source: Axios).

Why is this so important right now? Because the US Federal Reserve is talking about an attempt to move interest rates and Fed decision-making back to near-normal levels. In my opinion, this was the one fault of Alan Greenspan in 2006-07. The thought that we can raise rates to “near normal level” at any time when we have grown debt levels excessively throughout the world is failed thinking and ignorant, in my opinion.

The US Federal Reserve is trapped and almost backed into a corner. I believe the US Fed will find any rate increases above 1.00 before the end of 2023 will significantly disrupt the global speculative bubble. Any attempt to move rates to levels near or above 2.00 would represent a nearly +2000% rate increase in less than 12 to 24 months. If you want to see a shock to the global markets where global debt to GDP is closing in on 400%, try raising the FFR by more than 2000% over a short period of time. That is what I call “playing with FIRE.”.

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(Source: Axios)

2022 and 2023 will be filled with significant market trends and increased volatility. Right now, traders and investors need to understand the global markets are attempting to quickly transition away from a speculative/growth phase as the US Federal Reserve attempts to telegraph future rate increases. So it’s time to start thinking about how to prepare for unknowns and how to protect your capital more efficiently.

Growth sectors and US major indexes may continue to move higher for the next 30 to 60+ days, but my research suggests Q2:2022 may represent a “change in thinking” related to a late-2022 Fed shift. We are starting to see the markets move away from the speculative bubble-type trending we saw in 2020 and early 2021. Keep your eyes open and learn how to prepare for the big trends over the next 3+ years. The Fed is playing with fire right now. One wrong move and the markets could start a drastic price correction/reversion.

Finding The Right Trading Strategies

If you have struggled with finding opportunities over the past year or so and want to know which are the hottest sectors, or how to protect and grow your capital, then please take a minute to review my Total ETF Portfolio – Triple-Strategy Trading Plan to help you profit from these big market transitions.

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

I invite you to learn more about how my three Technical Trading Strategies can help you protect and grow your wealth in any type of market condition by clicking the following link:   www.TheTechnicalTraders.com

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen
Founder and Chief Market Strategist of The Technical Traders Ltd.

 

S&P 500 Trying to Hang On for The Week

The S&P 500 has gone back and forth during the course of the week as we continue to hang on to a major uptrend line. The uptrend line of course is something that a lot of traders will be paying attention to, and it is obvious that we have bounced from there during the course of the week. The neutral candlestick that we have formed, with a slightly negative body, does not necessarily mean anything one way or the other at the moment. Having said that, the market looks as if it is trying to continue grinding higher, and as long as we can stay above that uptrend line it is very likely that we will eventually go looking towards the highs. The 4800 level above has been significant resistance.

S&P 500 Video 17.01.22

A breakdown below the bottom of the weekly candlestick would of course be very negative, and that could open up fresh selling to reach down towards the 4500 level. That being said, the market is likely to continue to see a lot of volatility, as traders are trying to assess whether or not the Federal Reserve tightening monetary policy is going to continue to cause problems. At this point, it looks like we are hanging on by our bigger nails, so there is at least hope at this point in time. I would not be surprised to see more consolidation than anything else over the next couple of weeks, as we try to figure out what it is we are going to do. If we do break down, I would be a buyer of puts but I would not get aggressively short of this market. I would also probably pay close attention to the 4500 level.

For a look at all of today’s economic events, check out our economic calendar.

S&P 500 Bounces After Initial Selloff

The S&P 500 has fallen a bit during the course of the trading session on Friday to reach down towards the 4600 level. The 4600 level of course is a large, round, psychologically significant figure, which does offer a certain amount of support. After that, the 4500 level offers support from a psychology standpoint, and of course the fact that it is an area that we have seen buyers at previously. If we break down below that level, then I might be a buyer of puts, but I do not short this market regardless of what happens due to the fact that the Federal Reserve will step in sooner or later.

S&P 500 Video 17.01.22

Speaking of the Federal Reserve, the market is likely trying to price in those four interest-rate hikes, that a lot of people have been spooked by. This obviously has heard a lot of the technology highflyers, but the S&P 500 is full of more than just tech. Because of this, it is probably going to outperform other indices such as the NASDAQ, but at this point in time it is likely that we will see a lot of back and forth chopping behavior, but as long as we can hang onto the uptrend line, it is very likely that we will continue to find buyers.

The market is likely to continue to struggle to go higher, but I do not necessarily see some type of meltdown as being imminent. Because of this, position sizing will be crucial, but it is more than likely going to continue to be a situation where buyers will return on dips in the short term at the very least.

For a look at all of today’s economic events, check out our economic calendar.

QQQ: The Downside Risks on the Nasdaq Seem Exaggerated

The performance of the Nasdaq now encompasses a higher degree of volatility as seen by the 5.5 to 9% corrections in the Invesco QQQ Trust (QQQ) which has now become the new normal in a macroeconomic environment where hawkish Fed hiking interest rates is seen as being unfavorable to high-valued and unprofitable tech stocks.

Source: Initial chart from Trading View

For investors, QQQ tracks the Nasdaq-100 Index which features Apple (APPL), Alphabet A (GOOGL), Alphabet C (GOOG), Microsoft (MSFT), NVIDIA (NVDA), Meta labs (FB), Amazon (AMZN), Tesla (TSLA), Adobe (ADBE) and PayPal (PYPL). These are the main holdings out of a total of 102.

Assessing the risks

There are certainly risks in 2022 in the context of being invested in tech equities, but, I would like to bring to the attention of investors that despite all the volatility, QQQ has gained 6%, and this shows that the market’s repositioning (amid the rotation from growth to value names) does not seem commensurate with the forthcoming pace at which interest rates will increase.

Exploring further, trades are no longer crowded as in 2021 as people look for income or other asset classes to diversify. However, this diversification away from tech seems not to have hit QQQ’s main holdings which constitute 52.73% of the portfolio. As per my observation, this has been the case from April through December this year when most of the market gains were just from AAPL, MSFT, NVDA, TSLA, and GOOGL.

Source: Ycharts.com

Given the fact that the rotation has lacked in breadth, I see the corrections in tech as a rather muted market reaction, and this also prompts me to discard fears that tech stocks will suffer in the same way as during the bursting of the Internet bubble back in 1999-2000. At that time, in the first phase of the bear market, the large-caps names were doing fine but a large percentage of Nasdaq’s other components crashed by more than 50%. Ultimately, all the components crashed.

However, that was a completely different Nasdaq with the top stocks of the time being Cisco (CSCO) followed by Microsoft then Intel (INTC), or from the networking, software and semiconductor sectors respectively. Today, it is more about social media, online advertisement, internet marketplaces, electric cars, the cloud, smartphones, and virtual reality. In short, tech is now fully integrated into all spheres of economic and social life compared to twenty-two years ago.

Considering the inflation factor

Moderating slightly, QQQ’s other holdings seem to be impacted as investors become more selective, putting more emphasis on quality (free-cash-flow, balance-sheet, economic moat, etc) and valuations. Still, here also, rising inflation, currently at above 7% compared to 3.75% in 1999-2000 could prove to be more difficult for value stocks like banks as their customers suffer from rising prices and are faced with the rising cost of doing business. For this matter, as shown in the chart below, Bank of America (BAC) and Berkshire (BRK.B) saw a more pronounced dip in their total return level in August 2008 than Apple or Microsoft when inflation was above 5%.

https://static.seekingalpha.com/uploads/2022/1/14/49663886-16421719831560977.png

Source: Ycharts.com

Industrials are also likely to suffer from soaring raw material and labor costs. As for tech, they should better withstand high inflation with their ability to make use of software, AI, and automation tools more rapidly than companies from other sectors of the economy. These tools enable them to reduce operating costs and better circumvent wage inflation. Examples are FinTechs like PayPal’s (one of QQQ’s current underperformers) ability to reduce money transfer fees for customers compared to traditional banks and companies making use of cloud-based collaboration instead of having to invest in costly infrastructure.

Tech should continue to outperform as digital transformation enablers

Furthermore, with relatively less dependency on physical interactions caused by variant-related uncertainty, tech stocks are less likely to see a reduction in profitability. Here, some will note that Apple’s revenue share from its App Store ecosystem is increasing more rapidly than for devices and Tesla is considered as an internet-of-cars company.

Historically, as shown in the chart below, big tech’s gross profit margins have either increased or remained constant during the last five years, which include 2021, a year characterized by rapidly rising inflation.

https://static.seekingalpha.com/uploads/2022/1/14/49663886-16421723117351067.png

Source: Ycharts.com

Thus, inflationary pressures grappling the economy as from 2022 is likely to put valuations on the backstage, with tech, especially the more profitable ones, likely to continue seeing positive returns. This said tech remains highly dependent on semiconductors, a sector that needs to be watched closely for some short term pain when some of the big names report earnings on the last week of January. Finally, looking at the performance of the Nasdaq in 2020 and 2021 when it gained 43.64% and 21.39% respectively, even a 10-12% gain in 2022 would put it in positive territory.

Disclosure: I am long Apple. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

Preview: What to Expect From NetFlix’s Earnings Next Week

The California-based global internet entertainment service company NetFlix is expected to report its fourth-quarter earnings of $0.82 per share, which represents a year-over-year decline of over 30% from $1.19 per share seen in the same period a year ago.

However, the streaming video pioneer would post revenue growth of over 16% to $7.71 billion. It is worth noting that the company has beaten earnings per share (EPS) estimates just thrice in the last two years.

According to ZACKS Research, Netflix expects earnings per share of 80 cents in the fourth quarter of 2021. Zacks Consensus Estimate is pegged at $1.07 per share, higher than the company’s projection but down 10.08% from the quarterly figure reported a year ago.

In the fourth quarter of 2021, Netflix expects to have 222.06 million paid subscribers globally, an increase of 9% from the previous quarter. Revenue is expected to reach $7.71 billion, representing a 16.1% increase over last year. Based on Zacks Consensus Estimates, revenues are expected to be $7.70 billion, lower than the company’s expectations.

Netflix stock slumped nearly 3% to $65.86 on Friday. The stock rose over 12% so far this year after falling more than 2% in 2021.

Analyst Comments

“We believe share performance is highly dependent on increasing global membership scale. Proven success in the US and initial international markets provides a roadmap to success in emerging markets, and scale should allow Netflix (NFLX) to leverage content investments and drive margins,” noted Benjamin Swinburne, equity analyst at Morgan Stanley.

“Higher global broadband penetration should increase the Netflix (NFLX) addressable market, driving member growth and providing further opportunity given NFLX’s global presence. Longer-term, we see the ability to drive ARPU growth, particularly given increased original programming traction.”

Netflix Stock Price Forecast

Thirty-one analysts who offered stock ratings for Netflix in the last three months forecast the average price in 12 months of $662.93 with a high forecast of $800.00 and a low forecast of $342.00.

The average price target represents a 28.87% change from the last price of $514.42. From those 31 analysts, 23 rated “Buy”, five rated “Hold” while three rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $700 with a high of $900 under a bull scenario and $440 under the worst-case scenario. The firm gave an “Equal-weight” rating on the internet television network’s stock.

Several other analysts have also updated their stock outlook. UBS cut the target price to $690 from $720. Moffett Nathanson lowered the target price by $5 to $460. Baird slashed the target price to $575 from $680. Stifel cut the target price to $660 from $690.

Technical analysis also suggests it is good to hold for now as 100-day Moving Average and 100-200-day MACD Oscillator are giving a mixed signal.

Check out FX Empire’s earnings calendar

Citigroup Shares Fall 3% as Profit Declines 26% in Q4 on Higher Expenses

Citigroup shares fell nearly 3% on Friday after the New York City-based investment bank said its profit slumped 26% in the fourth quarter, largely due to reflecting higher expenses, partially offset by higher revenues and lower cost of credit.

The investment bank reported quarterly adjusted earnings of $1.46​​ per share, beating the Wall Street consensus estimates of $1.38 per share. The company said revenue rose 3.1% to $17.02 billion from a year ago. That too beat the market expectations of $16.75 billion.

Net income of $3.2 billion decreased 26% from the prior-year period, reflecting higher expenses, partially offset by higher revenues and lower cost of credit.

Following this, Citigroup stock slumped nearly 3% to $65.86 on Friday. The stock rose over 12% so far this year after falling more than 2% in 2021.

Moreover, JPMorgan shares also slumped over 4% in pre-market trading on Friday after the leading global financial services firm said a slowdown in its trading arm caused its profits to decline by 14% in the fourth quarter.

For the full year 2021, Citigroup reported a net income of $22.0 billion on revenues of $71.9 billion, compared to net income of $11.0 billion on revenues of $75.5 billion for the full year 2020.

Analyst Comments

“While the stock is cheap at 0.6x NTM BVPS, and new CEO is taking strong, proactive strategic action to boost returns closer to peers, we believe these actions will take time to play out,” noted Betsy Graseck, equity analyst at Morgan Stanley.

Citi is exiting 13 consumer businesses in Asia and EMEA, and focusing on higher-growth areas of US consumer, Asia WM, International wholesale and consumer payments. These actions could drive ROE higher than the 9% we are modelling for 2023, but we expect the stock will only start to fully reflect this once revenues begin to accelerate. Citi benefits less than peers from higher rates, and we expect some of our more rate sensitive stocks will outperform as the Fed begins to raise rates next year.”

Citigroup Stock Price Forecast

Fifteen analysts who offered stock ratings for Citigroup in the last three months forecast the average price in 12 months of $78.56 with a high forecast of $120.00 and a low forecast of $64.00.

The average price target represents an 18.30% change from the last price of $66.41. From those 15 analysts, eight rated “Buy”, seven rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $82 with a high of $111 under a bull scenario and $53 under the worst-case scenario. The firm gave an “Equal-weight” rating on the investment bank’s stock.

Several other analysts have also updated their stock outlook. Jefferies cut the target price to $80 from $87. JPMorgan slashed the target price to $76 from $80.5. Piper Sandler lowered the target price to $88 from $94. Evercore ISI cut the target price to $64 from $74.

Technical analysis also suggests it is good to sell as 100-day Moving Average and 100-200-day MACD Oscillator signals a strong selling opportunity.

Check out FX Empire’s earnings calendar

JPMorgan Shares Slump Over 4% as Profit Declines 14% in Q4

JPMorgan shares slumped over 4% in pre-market trading on Friday after the leading global financial services firm said a slowdown in its trading arm caused its profits to decline by 14% in the fourth quarter.

The New York City-based investment bank reported quarterly adjusted earnings of $3.33​​ per share, beating the Wall Street consensus estimates of $3.01 per share. The largest bank in the United States said its revenue jumped 0.6% to $30.35 billion from a year ago. That was also above the market expectations of $29.89 billion.

The bank with over $3.0 trillion Assets Under Management (AUM) said its net income was $10.4 billion, down 14%, driven by higher noninterest expense. Non-interest expense was $17.9 billion, up 11%, largely on higher compensation

Following this, JPMorgan stock slumped over 4% to $160.80 in pre-market trading on Friday. The stock rose over 6% so far this year after gaining nearly 25% in 2021.

Analyst Comments

JPMorgan (JPM) is trading at 12x our 2023 EPS, which includes accelerating loan growth and 5 rate hikes from here (2 in 2022 and 3 in 2023). With that backdrop, we see more upside elsewhere in the group, particularly in consumer finance stocks which have been under more pressure. This drives our relative Underweight rating,” noted Betsy Graseck, equity analyst at Morgan Stanley.

JPM also has less excess capital as a % of the market cap relative to other names in the group, which drives a lower benefit from buybacks.”

JPMorgan Chase Stock Price Forecast

Fifteen analysts who offered stock ratings for JPMorgan Chase in the last three months forecast the average price in 12 months of $184.23 with a high forecast of $210.00 and a low forecast of $125.00.

The average price target represents a 9.51% change from the last price of $168.23. From those 15 analysts, 10 rated “Buy”, three rated “Hold” while two rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $184 with a high of $233 under a bull scenario and $119 under the worst-case scenario. The firm gave an “Underweight” rating on the investment bank’s stock.

Several other analysts have also updated their stock outlook. Citigroup raised the price target to $188 from $184. Jefferies cut the target price to $192 from $198. BofA Global Research lifted the price objective to $200 from $190. Piper Sandler increased the target price to $192 from $190.

Technical analysis also suggests it is good to hold for now as 100-day Moving Average and 100-200-day MACD Oscillator are giving mixed signals.

Check out FX Empire’s earnings calendar

S&P 500 Approaching the Up Trendline

With almost every tick down, sellers are celebrating the new bear market. Most of that is generally just wishing not trading and is mostly betting on possibility than probability, but we all know that in trading it’s the probability that wins.

S&P 500 daily chart

With that being said, let’s talk a look on the SP500, trying to be as much objective as we can, taking into consideration only the chart and the story behind it. First thing you see is the rise from the end of the year, which ended with establishing the new all-time highs. Many will call it a Santa Rally and they will not be mistaken. We can see, that it allowed to break the crucial horizontal resistance around 4740 (orange). Just for a while though, which actually can be worrying as it makes a false bullish breakout (yellow). False breakout usually tends to give strong signals in the opposite direction, so in our case, to the downside.

There is an important resistance (orange) but there is also a support. The crucial one is the dynamic up trendline (black), connecting most recent higher lows. It helped the buyers a few times and can help them again.

We are currently locked between the horizontal resistance from the top and the dynamic resistance from the bottom. As long as we stay between them, there is no clear trading signal. The breakout of the 4740 resistance, will give us another mid-term buy signal and the breakout of the up trendline, will give us a signal to sell, as for now, the best option seems to patiently wait.