The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide


The bubble isn’t burst yet.


Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite
COMP,
-1.99%

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle
ORCL,
+0.66%

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
ZM,
-1.32%
.
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
PTON,
-3.75%
,
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
RIO,
-1.67%
,
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures
ES00,
+0.65%

NQ00,
+0.64%

were stronger.

Gold futures
GCZ20,
-0.46%

fell while oil futures
CL.1,
+0.21%

edged higher.

The British pound
GBPUSD,
+0.18%

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla
TSLA,
+1.38%

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple
AAPL,
-3.26%
,
Alphabet
GOOGL,
-1.36%

and Facebook
FB,
-2.05%

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify
SHOP,
-1.59%

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.



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Java Bulls Have Fewer Reasons To Be Buzzed


In a remarkable turnabout, coffee futures have become the commodity trading vehicle of choice for a growing number of managed funds. Indeed, its increasing popularity has given coffee prices a much-needed dose of price momentum, making it one of this summer’s hottest commodities. But a growing body of data suggests that the bulls won’t be able to maintain control of the java market much longer. Here we’ll review the fundamental and technical evidence which points to potentially lower prices ahead.

A major catalyst behind coffee’s recent price gains is the growing number of hedge funds playing the long side of the market. This can be clearly discerned in the latest Commitments of Traders (COT) reports from the CFTC. It shows that non-commercial traders (including hedge funds and institutions) have dramatically increased their long positions in coffee futures in recent weeks, while covering prior short positions.

Commenting on the increase in managed money pouring into the market, the most recent S&D Coffee & Tea Report observed:

The driving force [for coffee] was once again focused on larger speculative buying as funds added about 5K lots to their net long position.

Against this increase in speculative interest, however, the fundamental background for the bean market has also seen significant deterioration lately. While some industry reports show ICE stocks are at low levels as the industry tries to get a handle on transport-related disruptions, other reports point to a disturbing decrease in long commitments among commercial players.

The following graph shows the December coffee futures contract along with the latest COT numbers. As you can see, though prices have risen dramatically since July, the commitments of commercials (red line at bottom of chart) have been quickly declining since August. That’s a pretty good indication that the major players – the ones who really know what’s going on in the industry – aren’t convinced that prices will continue rising in a sustained fashion. And if the commercials aren’t showing bullish conviction, it’s usually a good idea for smaller traders to follow their footsteps and avoid overcommitting to the long side of the market.

Source: BarChart

The next chart exhibit (from the Tradingster website) provides an even broader perspective of the massive gap between the trading positions of non-commercials (blue line) and commercial (gray line) participants. In the past, whenever there has been a gap this conspicuous between the two classes of traders, coffee prices have faced serious headwinds in the weeks-to-months that followed.

Coffee Commitments of TradersSource: Tradingster

From the macro perspective, a weaker U.S. dollar has contributed to higher coffee prices this summer, as has the Fed’s easy money policy and corresponding commitment to keeping interest rates low. But the dollar is only one variable of the complex coffee market equation; an equally important (some would argue even more important) determinant for future coffee prices is the Brazilian real currency.

As the following graph illustrates, Brazil’s currency is weak, a fact that doesn’t favor significantly higher coffee prices ahead. Historically, a stronger real is supportive for coffee prices on the world market, while a weak real is typically a headwind. As previously discussed, the real’s devaluation has proven to be the enemy of coffee exporters since banks have cut credit lines, making it more difficult to export products. Moreover, a weak real has pushed domestic prices higher, thereby decreasing the flow of business abroad.

Brazilian RealSource: BigCharts

For the coffee bulls to have a good chance at maintaining their near-term control over the market, the real-to-dollar pairing shown above should ideally push decisively above the 0.21 level (near the previous peak from early June). This in turn would likely put upward pressure on bean prices on the global market. Otherwise, the weak real is likely to exert a dampening effect on prices going forward.

Although the virus-related shutdowns have put a crimp on the transporting of coffee in some countries, one thing that apparently hasn’t been disrupted by COVID is the latest harvest. In Brazil, the first harvest is over and few worker-related disruptions were reported; instead, the harvest went off without any major weather-related hitches. What’s more, preliminary estimates suggest Brazil may have had its biggest harvest ever. From a supply perspective, this is another key fundamental consideration which will likely weigh on prices in the coming weeks.

In closing, it’s important to remember that the upward price momentum of front-month coffee futures prices has been strong lately, so it’s possible there may be a final thrust higher in the market before the next major top is in. But based on the collective evidence we’ve discussed here – from declining commercial trader support, to a healthy Brazilian bean harvest, to weak Brazilian currency – the odds don’t favor the coffee market rally continuing much longer. Sooner or later, the deteriorating fundamentals we talked about will exert a negative impact on coffee.

Accordingly, if you’re long coffee futures or a coffee ETF, I recommend taking some money off the table and raising stop-losses on existing positions to protect against the heightened risk of a sharp price decline in the coming weeks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Value bulls bang drum for cheap stock resurgence on Fed, vaccine hopes By Reuters


© Reuters. The front facade of the of the NYSE is seen in New York

By Rodrigo Campos

NEW YORK (Reuters) – As U.S. stocks hit record highs, some investors are betting the market’s future gains will be increasingly driven by some of its lesser-loved companies.

Value stocks – shares of economically sensitive companies trading at multiples that are usually below those found on growth names – have been among the laggards in the market’s blistering rally from its March lows.

Some investors believe the relative cheapness of value stocks, which include energy companies, banks and industrial conglomerates, will catapult them to leadership if the nascent U.S. economic revival gains momentum, shifting focus from the big technology-related stocks that have led markets during the coronavirus pandemic.

The Russell 1000 Value index <.rlvtri> trades at almost 18 times earnings, up from 14 a year ago, and is up some 45% since late March. By comparison, the Russell 1000 Growth index <.rlgtri> trades at a multiple of 31, up from 22, and has gained over 70% in the same period.

“It’s an important part of validating the market’s rise, to have cyclicals and value sectors move,” said Nicholas Colas, co-founder of DataTrek Research.

“At the end of the day I think value can outperform, but it’s going to be very episodic.”

(Graphic: Russell 1000 Forward P/E ratios – https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/nmovaqqwwva/chart.png)

Hopes of economic healing got a second wind Thursday, when Federal Reserve Chairman Jerome Powell rolled out a sweeping policy rewrite that puts more focus on fighting unemployment than controlling inflation, sending shares of banks like Wells Fargo (NYSE:) and Citigroup (NYSE:) higher on the day.

Investors in the coming week will be keeping a close eye on Friday’s U.S. non-farm payrolls data, looking for a snapshot of how the country’s economic recovery is faring.

Other arguments for a value resurgence have been fueled by signs of progress on a vaccine against COVID-19, which some investors believe could accelerate business reopenings and a return to in-person schooling across the United States.

U.S. President Donald Trump has said a vaccine for the novel coronavirus could be available before the Nov. 3 presidential election, sooner than most experts anticipate.

Some analysts, including those at Goldman Sachs (NYSE:), believe a vaccine could be approved as early as the end of this year.

That could take the S&P 500 as high as 3,700 by year-end and spur a rotation to value names, especially if the news flow regarding a vaccine continues to be encouraging, Goldman’s analysts said earlier this month. The index recently hovered near 3,500.

Plenty of market participants doubt value will return anytime soon, or that such a move can be timed profitably.

Value sectors such as retail have struggled for years with lackluster earnings or business models that are being disrupted in a shift to a more tech-driven world, a process that accelerated during the coronavirus pandemic.

“Valuation alone doesn’t drive stock prices. It’s the combination of valuation and improving fundamentals,” said Richard Bernstein, chief executive officer and chief investment officer at Richard Bernstein Advisors in New York.

“For value to outperform, one typically needs profit growth to accelerate. That’s not happening yet,” he said.

BofA Global Research points out that value stocks have led during the recovery from every one of the last 14 recessions.

Yet it also warns of “value traps” – stocks whose prices are falling faster than earnings are deteriorating. Such stocks have underperformed broader markets by four percentage points a year since 1997, the bank said.

BofA’s model identified energy and brick-and-mortar retail as sectors where value traps can be found.

(Graphic: Performance of Russell 1000 Growth v. Value – https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/dgkplllxjpb/chart.png)

Kim Forrest, chief investment officer at Bokeh Capital Partners, believes resurgences in value may be a thing of the past.

Technology has transformed the way companies deal with their inventory and altered the business cycle, sapping the benefits cyclical companies would receive from an upswing in growth, she said.

“There are some dinosaurs that don’t get that the comet has hit and the (investment) environment has changed,” said Forrest.

Others, like Bill Smead of Smead Capital Management, remain hopeful.

An eventual rise in inflation could boost the shares of energy companies, banks and home builders, which have tended to perform better when consumer prices trend higher, Smead said in a note to investors.

Even longtime value bulls like Smead can have their fortitude tested, however.

“We are patient, but that patience doesn’t last forever,” he wrote.





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Wall Street Rallies as Bulls Feast on Stimulus, Vaccine Optimism By Investing.com


© Reuters.

By Yasin Ebrahim

Investing.com – Wall Street ended higher on Wednesday on optimism that U.S. lawmakers will agree to a fresh round of coronavirus stimulus sooner than later.

The rose 1.39%, or 372 points. The gained 0.64%, to move within 2% of its all time high. The jumped 0.52% to close at another record high.

A sea of green washed over stocks as investors cheered signs of progress on the virus aid bill, which many believe is critical to support the economy’s nascent recovery. Lawmakers on both sides of the aisle were said to have made some concessions to break the deadlock.

Senate Majority Leader Mitch McConnell said on Tuesday that he was “prepared to support” federal unemployment benefits being brought back at that $600/week level – a key sticking point that has been holding up progress.

The bill could also include further aid for airlines after 16 Republican Senators reportedly called for $25 billion in federal aid for the airline industry to be included in the virus relief package amid fears of looming job cuts as payroll assistance is set to end on Oct. 1.

American Airlines (NASDAQ:) surged 10%, United Airlines (NASDAQ:) was up 4% and Delta Air Lines (NYSE:) (NYSE:DAL) added 3%.

Investor sentiment was also helped by positive news on the vaccine front.

Johnson & Johnson (NYSE:) announced a deal to develop 100 million doses of its potential Covid-19 vaccine for the US for $1 billion. NVAX also revealed a positive update late Tuesday on its vaccine candidate, sending its shares up 10%.
Energy, meanwhile, added to gains from a day earlier, underpinned by rising oil prices amid data showing a weekly fall in stockpiles.

Crude inventories fell by 7.4 million barrels last week, a larger draw than the 3 million barrels expected, sending oil prices nearly 3% higher.

Financials were boosted by a 7% surge in Square (NYSE:) after the payments company delivered better-than-expected quarterly results thanks to strong growth in its consumer payments app.

Walt Disney (NYSE:) jumped about 9% after revealing a surprise fiscal third quarter profit on cost cuts and strong growth in its streaming business. The company also said the remake of Mulan would be available to stream in September.

Elsewhere on the earnings front, Beyond Meat (NASDAQ:) fell about 7% after reporting mixed results as earnings were in-line, but revenue fell short of estimates. The company also flagged higher than expected costs and weakness in its food service channel.

“(T)he quality of results was weaker than we expected with the exclusion of $7.4M of COVID costs and donations and U.S. Foodservice channel sales down 59% with a slow exit rate for sequential recovery,” Credit Suisse (SIX:) said in a note.

In tech, the “Fab 5” pared losses to end mostly higher. Amazon (NASDAQ:), Alphabet (NASDAQ:), Facebook (NASDAQ:) and Apple (NASDAQ:) rose, while Microsoft (NASDAQ:) was lower.

On the economic front, U.S. services activity in July topped estimates, but the labor market continues to show signs of weakness ahead of the nonfarm payrolls report later this week.

The U.S. private sector added 167,000 jobs in July, short of forecasts of 1.5 million jobs.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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Bearish Case For Dollar Thickens, But Bulls Are Tough To Find


A surge in virus cases and record fatalities in several US states dampened the animal spirits at the end of last week. However, few seem emotionally or materially prepared to resist the official efforts to generate favorable financial conditions to facilitate an economic recovery. Most seem to be expecting more policy support to be forthcoming.

The bearish technical case for the dollar appears to be growing. It is a little disconcerting that it seems to have become the consensus view, and the gross and net long speculative euro positioning in the futures market is near two-year highs. However, the speculative positioning in the other currency futures is not nearly as extreme. Indeed, speculators are still net short sterling, Australian dollar, and Canadian dollar.

Turns in the market often appear to have a cascading effect. The turn does not happen all at once. Given that the euro is the single most important currency in the world after the dollar, that is the real interest. The Swiss Franc can sometimes be seen as its lead indicators. The Golden Cross (50- and 200-day moving averages) crossed down for last July. The euro’s averages crossed late last month, and at the start of last week, the 50-day moving average moved below the 200-day moving for the Dollar Index. The moving average for the Swedish krona crossed in the middle of June, while the Aussie’s averages crossed on the last session in June.

Sterling is a laggard, and the 50-day moving average is about 2.5 cents below the 200-day moving average. And so is the Canadian dollar. The New Zealand dollar’s average looks set to cross early next week, and Norwegian krone may take a little while longer. We note that both the S&P 500 and the Shanghai Composite experienced the Golden Cross on the same day last week (July 9).

Also, adding to the bearish technical outlook for the dollar was the advance in gold. It has rallied now five consecutive weeks and pushed above $1,800 an ounce for the first time in nine years. Nor has the greenback drawn much succor from the fact that the Fed’s balance sheet has shrunk for four consecutive weeks, while the ECB’s balance sheets jumped by more than 11% over the same period, which stands contrary to conventional wisdom.

Dollar Index: The Dollar Index fell for the third consecutive week. The poor close warns of scope for additional near-term losses. A note of caution comes from the lower Bollinger Band, which begins the new week near 96.35. The Slow Stochastic is still trending lower, and the MACD looks poised to turn lower. The first support area is seen between 95.70 and 96.00. The year’s low was set in early March around 94.65 and that, or the 93.90 retracement area, are more important targets.

Euro: The euro set a four-week high near $1.1370 on July 9 and reversed lower to $1.1255, about 15 ticks ahead of the week’s low. However, the US market has been particularly keen to sell dollars, and they did so against ahead of the weekend and sent the euro back to $1.1325 into the close of European markets for the week. The momentum indicators are still favorable. Resistance is seen around $1.14, and June’s three-month high was about $1.1420. A break of the $1.1170 area would undermine the bullish technical case. The $1.16-$1.18 target for seems reasonable, though the Bloomberg consensus for year-end is $1.1400.

Yen: The market rejected the dollar when it poked above JHPY108 in early July, and it kept selling the dollar last week. It pushed it below JPY107 for the first time in a couple of weeks. The Slow Stochastic is moving lower, and the MACDs are gently easing. In May and June, the dollar found support a little above JPY106.00. The lower Bollinger Band is around JPY106.55.

British Pound: In the last two weeks, sterling has recovered drop to around $1.2250 to approach the 200-day moving average near $1.2700. The upper Bollinger Band is found near there too (~$1.2675). The momentum indicators allow for additional near-term gains. Last month’s high was almost $1.2815. However, that trendline that connects the March (~$1.32) and June highs starts next week a cent lower. Support may be found in the $1.2500-$1.2520 area.

Canadian Dollar: The Loonie was the underperformer last week. It was the only major currency that fell against the US dollar (~-0.3%). The US dollar remains in a range against the Canadian dollar of roughly CAD1.3500 to CAD1.3700. The range has been intact for a month, though it did fray the lower end of the range last week (~CAD1.3490 low). The sideways movement has muted the momentum indicators. In a weak US dollar environment, the Canadian dollar often lags behind the other majors. The greenback is testing a downtrend line that connects the March, May, and late-June highs. It appears to come in a little below CAD1.3590 at the start of the new week.

Australian Dollar: After several tests, the Aussie poked briefly above $0.7000 for the first time in a month, but there were no follow-through gains, and it returned to $0.6925, the lower end of the week’s range ahead of the weekend. The MACD has flatlined, while the Slow Stochastic appears to be curling down. Before the weekend, the Aussie closed below its five-day moving average (~$0.6960) for the first time this month. Key support is not seen until the $6780-$0.6800 area, but a break of $0.6900 would disappoint some bulls.

Mexican Peso: The dollar has fallen in eight of the past ten sessions against the Mexican peso, over which time it shed about 2.2%. The greenback was turned away from MXN22.90 early last week and posted an outside down day ahead of the weekend (trading on both sides of the previous day’s range and then settling below that low). A trendline drawn off the February low (~MXN18.56), the June low (~MXN21.46), and the last week’s low (~MXN22.15) starts the new week near MXN22.35.

Chinese Yuan: The dollar’s seven-day slide that took it below CNY7.0 for the first time since March, stalled ahead of the weekend. It managed to settle just above that once key level, which is essentially the middle of this year’s range. Some link the yuan’s rise to underweight foreign investors having to chase the stock market higher. Even with the nearly 2% pullback at the end of last week, the Shanghai Composite netted a 7.3% gain, and the Shenzhen Composite rose 10.25%. The yuan outperformed most emerging market currencies and the dollar-bloc currencies, sterling, and the Norwegian krone. Chinese officials have succeeded in keeping the yuan fairly steady against the US dollar.

Gold: The buying enthusiasm faded in the middle of last week as the yellow metal reached $1,818. It consolidated within Wednesday’s trading range during the last two sessions. The momentum indicators look poised to turn lower, which has made us cautious. A month-long trendline begins next week near $1,790, and a break could signal a setback into the $1,750-$1,765 area. Gold has rallied from around $1,670 in early June, and some consolidation should not surprise.

Oil: The September WTI contract has advanced in eight of the past ten weeks, during which time it has risen from below $30 to almost $42. However, the contract slipped to nine-day lows (< $38.80) ahead of the weekend, before staging a smart rebound and closed near new session highs of almost $41 barrel. Neither the MACD nor Slow Stochastic is generating a strong signal. The June high near $41.75 is the next obvious target, which is also about the middle of this year's range, and there is the gap from March that extends toward $42.50. Although violated intraday, the trendline off the late May low (~$32.20), mid-June low (~$35.00), and late June low (~$37.30) may still be valid and begin next week near $39.50.

US Rates: Fears that the new outbreaks will have a material impact on the economy encouraged lower yields and appeared to help ensure a strong reception to the US 30-year bond auction. Most foreign investors prefer shorter maturities, but indirect bidders showed up in force even with yields at new two-month lows. The US 10-year yield fell to almost 56 bp at the end of last week, its lowest level since mid-May. The same story holds for the two-year yield. It approached 13 bp for the first time since mid-May. The record-low was just above 10 bp, but the five-year note yield did register a new record low of almost 25 bp ahead of the weekend, before bouncing back to nearly 30 bp. A near-term low in rates may have been seen, but the upside continues to appear limited.

S&P 500: The S&P 500 spent the week alternating between gains and losses to net about a 1.5% increase that keeps it knocking on the 3,200-cap ahead of the three-month-plus high set in early June near 3,233. The lack of transparency with Q2 earnings season getting underway in earnest has been cited by many observers as a challenge, but that assumes earnings matter right now. The market does not appear to be trading with much of a focus on the April-June period. Admittedly, the advance of the S&P 500 seems narrow. Nevertheless, the price action remains constructive. Many keep looking for European stocks to outperform the US, but if it is going to happen, it has not begun yet. In the past two weeks, the S&P 500 has gained about 5.70%, while the Dow Jones Stoxx 600 is up 2%.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.





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