Natural Gas (Short) – In the money, trail your stop. Recent low of $3.73, from entry of $4.02
Clicks Group (Short) – Our of the money by 186c as at Friday’s close.
S&P 500 (Short) – Take Profit Reached
Richemont (Short) – Take Profit Reached
Marks and Spencer Plc (Long) – Take Profit Reached
Brent Crude Oil (Short) – Take Profit Reached
For much of last week global equities traded on the back foot, with concerns around the Federal Reserve’s intention to taper it’s long standing bond-buying program. Adding to the risk-off tone were concerns around global growth, specifically out of China as well as the Delta variant that is seeing several countries going back into a lock-down phase. Reflecting these concerns were the sell-off in global equities from Monday through Thursday after which we saw a moderate (intraday) rebound on the second-last trading day of the week. Also lower was Brent Crude Oil which tested $65.60, down from it’s 06-July peak of $77.82. On Friday, equities rebounded, with the S&P 500 cash index higher by 0.81%, the Dow Jones Industrial Average adding 0.65% while the Nasdaq Composite and Russell 2000 (Small Cap) Index edged higher by 1.19% and 1.56% respectively. While indices rebounded following the sell-off, it should noted that the underlying breadth has continued to deteriorate.
Reviewing the data, the following was noted:
NYSE: Number of New Lows at 96 vs 44 one week ago
NYSE American: Number of New Lows at 19 vs 6 one week ago
NYSE ARCA: Number of New Lows at 29 vs 21 one week ago
Nasdaq: Number of New Lows at 264 vs 167 one week ago
The weekly summary, via the Wall Street Journal (WSJ) is provided below:
JSE Breadth Data
On the JSE, considering stocks with a market capitalization above R2bn, the following was noted:
Number of New 1-Month lows: 19
Number of New 1-Month highs: 21
Number of New 3-Month lows: 9
Number of New 1-Month highs: 13
Number of New 6-Month lows: 4
Number of New 6-Month highs: 10
Number of New 52-week lows: 0
Number of New 52-week highs: 9
US Dollar Index (DXY)
One of the key charts into our process is the US Dollar, which is serves as a risk barometer. Last week, we saw the currency index trading at a fresh 10-month high, in line with the S&P 500 which also trading down, in line with our expectations. If you were watching closely, the 93.20 level on the DXY was a battleground for the bulls and bears, with the bulls finally taking control and pushing the index as high as 93.72 for the week before retreating to close at 93.45. The price has reclaimed it’s 200-day moving average while also having developed a cup and handle technical formation. Medium term, the trend has been higher. Short term however, there may be a period of consolidation or moderate rectracement.
Another key input, which adds to the weight of the evidence, is AUDJPY. Why focus on THIS pair? On the one side, any advance in AUD suggests a risk-on environment, partly due to it’s correlation to growth but also due to it’s proximity to China as a driver of global growth (for e.g. commodities). On the other side of the pair is JPY which is considered a safe-haven. Thus, A rising pair equals suggests risk on, while a falling pair suggests risk off. Our most recent idea in the pair was a short from 16 June, which has now traded beyond expectations. If you overlay this pair with the S&P 500 index, you’ll notice the close correlation however a breakdown , also from mid-June. Is the S&P 500 going to eventually “catch down”?
S&P 500 Index
Speaking of the S&P 500 Index, I had a look at the weekly chart. Here’s what I noticed:
Over the past decade, we saw 4 pullbacks to the 200-week SMA. Each time prior to that, the price was extended as follows vs the 200w SMA:
July 2011: +13%
Nov 2015: +15%
Currently, the index trades 41% above it’s 200-week SMA. This is the highest in a decade and well above average of the prior extensions. For medium term holders, I’d continue bearing this statistic in mind.
Bottom Line: The index is extended
Iron Ore: Our prior key level on the commodity was a $215/220, of which a break below would have signaled a downside risk opening. Month-to-date, the price has come under considerable pressure as concerns over Chinese growth have intensified. On the monthly chart, the price is now back within it’s 6-year channel with the candle structure suggesting strong selling have commence.
On the local market, Kumba Iron Ore has reflected the pullback in the commodity however, what about Afrimat which also has some Iron Ore exposure? Consider the weekly chart where the upside momentum appear to be slowing. From it’s breakout level of around 3600c one year ago, the price is now retreating from it’s 261.80% Fibonacci Retracement Level. Note the prior Fib extension at 4700c (the 161.8% retracement) saw a a pullback to just above 3600c. Management has delivered, with the market lauding their prudent (and proven) capital allocation abilities over the last few years. The long term trend remains up, with the price above a rising weekly 50-EMA however a pullback to this level is possible (now trading just below 4800c).
A ‘Year 2’ Environment
After the 2020 upward thrust, 2021 proving to be a ‘Year 2’ calendar year. Meaning, much chop at both an index level as well as individual names. Similar examples in years gone by, using the S&P 500 has the barometer :
1974/1975 to 1976/1977
1982/1983 to 1983/1984
2003 to 2004
2009 to 2010
Defensive Sectors Leading
Utilities: With deteriorating breadth, it is no surprise to see certain sectors outperform others. Take Utilities for example. With lower interest rates, market participants require a steady, predictable yield. Utilities offer that, and so the share prices reflect demand. Note the setup in Dominion Energy, is setting up similar to NextEra Energy we highlighted two weeks back (09 & 10-August). Clean breaks from triangle formations. Simple structures are what we’re attracted to.
NextEra Energy (NEE)
Dominion Energy (D)
Healthcare: On an absolute basis, the sector has been a strong performer since April, with a number of names appearing on our scan at the time. On a relative basis, it has only recently started turning the corner versus the S&P 500. The relative ratio chart can be seen below.
Also, have you seen the Low Volatility names emerging from a base, relative to it’s High Beta peers? Investor taking shelter in boring but steady names?
Value is at risk versus Growth – see trend line being tested.
Small Caps breaking down versus Large Caps.
And, our Global Safe-Haven Index above a rising 50-day EMA. This means that there is demand for safe-haven assets (US Dollars, Bonds, Japanese Yen, Low volatility stocks along with supply of risk assets (including Emerging Markets and Copper).
Some of what we’re watching:
Netcare (NTC, 1591c) – both LHC and APN have been strong performers for clients who participated. Is it possible that it could be a catch-up trade? The share has developed an ascending triangle pattern on it’s weekly chart. The 50-week EMA has been reclaimed and the MACD has been trading above the zero bound. We also note the weekly RSI at 60 – a strong rank.
Royal Bofokeng Platinum (RBP, 8816c): Big pullback to the breakout level. I’m watching R65-R72 as a potential accumulation range. Monthly Chart.
Vestas WInd Systems Long swing setup post earnings. Confirmed on a daily close above DKK258.
This morning, Asian equities are in positive territory. US Futures are also higher. USDZAR: 15.22. Tencent +2.91%. BHP (Sydney): +1.52%.
PLEASE NOTE: This report does not include all insights and ideas currently held by the analyst and may differ from other views expressed on this website.
Our preference is to respond to trading opportunities in real-time, using an opportunistic and flexible approach as prices may be influenced by additional market data, news and changes in price action/structure. All data and charts are as at the close of Friday 20 August 2021 and represent a best probability plan and perspective. In addition, levels within this report are subject to change based on the aforementioned while additional ideas/thoughts will follow as the week progresses.
Research and Analysis by Lester Davids, Investment Strategist.
Trading Desk Contact Detail: Call: 011 384 2923 or email firstname.lastname@example.org