US Markets – Chart Update

Posted on | by Leon Hinde | Leave a Comment on US Markets – Chart Update

US Stock Indexes closed lower on Friday as option expiration and continued weakness in the financial sector offset gains in the industrial and utility names.

The Financial index finished the day over 1.5% lower with the major banks stocks: JP Morgan, Goldman Sachs, Citi Group and Bank of America all falling by more than 1% by the New York close.

With the SP 500 index now trading at 22 X earnings on a forward yield of just under 2.5%, the medium-term fundamentals don’t appear to support the high level consolidation at these prices.

Technically, the SP 500 index has not closed below the 30-day moving average in over 4 months.

We now see key price support at 2356.00. A break of this level would likely extend back to the February 13th low of 2310.00.

Chart below of Dow Jones Index and S&P500

 

Chart – IVV (S&P500 ETF)
Chart – Dow Jones

 

Computershare – Put Option Play

Posted on | by Leon Hinde | Leave a Comment on Computershare – Put Option Play

Computershare looks expensive.

We generally don’t participate on the buy-side when it comes to options on individual stocks.  However, we do buy index options to hedge portfolios or to make profits on short-term corrections.

In the current environment, when some stocks look overvalued, it makes sense to buy put options on a stock specific basis.

Let’s track these over the weeks ahead as a strategy to profit from a pull-back in the share price of CPU.

We buy the $13.75 May Put options for $0.45.

CPU – May Option Prices
Chart – CPU

 

 

China – A stronger start to 2017

Posted on | by Leon Hinde | Leave a Comment on China – A stronger start to 2017

The Chinese government suggests there’ll be  no hard landing. China’s financial system is generally stable and there are no systemic risks.  Adding, that the government has enough policy tools to handle any risks.

China’s fiscal revenue and expenditure saw faster growth in the first two months of 2017, driven by an improved economy and higher spending on social welfare, official data showed yesterday.

Fiscal revenue rose 14.9% Y/Y to 3.15 trillion yuan (US$456 billion) in January and February, accelerating from 4.5% in 2016, according to data from the Ministry of Finance.

The ministry attributed the revenue pickup to positive trends in the Chinese economy, citing improvement in industrial activity, company profits, foreign trade and resident consumption.

The government is increasing policies to curb property price inflation within major cities and stem broader capital outflows from the Chinese economy. We continue to see these two issues as risks that may yet be underappreciated by the markets.

Chart – IZZ ETF (China Large Cap)

 

 

 

 

Index Chart Update – XJO, Dow Jones & NASDAQ

Posted on | by Leon Hinde | Leave a Comment on Index Chart Update – XJO, Dow Jones & NASDAQ

The Dow Jones had a minor retracement from the 1 March high of 21,169 to close the week out at 20,902. Wednesday in the US will see the Fed Reserve hand down their decision on US rates, with the market now pricing in a 92% chance of a .25% increase.

Interestingly, defensive names such as consumer staples have been some of the best performing stocks, (on a relative basis), when compared to other market sectors over the past month. In many cases, we’re now seeing PE ratios extend to 22x earnings and yields compressing down to 2.2%.

Dow leaders such as Boeing & Goldman Sachs are selling off after their terrific rally and GE, which has under performed lately, showed strength in Friday’s session.

Due to stretched equity valuations, we’re most likely to see further consolidation in the major indices.

Chart – Dow Jones
Chart – NASDAQ
Chart – XJO

 

US Payroll Preview

Posted on | by Todd | Leave a Comment on US Payroll Preview

The  US Non-Farm Payroll (NFP) report, scheduled for 12:30 am Sydney time tonight, could have a significant impact on global financial markets.

In a speech last Friday, FED Chief Janet Yellen was very clear that steady employment growth and rising inflation were the key indicators guiding US interest rate policy.

Tonight’s report will reflect both the number of new jobs created in the month of February and the pace of wages growth.

Wednesday’s release of the ADP private sector job’s report printed much higher at 298,000 on expectations of 184,000. And while the ADP data is far from a foolproof indicator of the NFP report, it would be a big surprise if the headline jobs number printed much below the 200,000 consensus forecast.

Against this backdrop of an imminent FED rate hike, US 10-yr bond yields have reached a three year high of 2.64%, Gold has dropped below $1200.00, Crude Oil has fallen more than 8.5% this week and Copper has lost more than 6% over the last 10 trading sessions.

It’s likely that a NFP print of  230,000, or more, will be bullish for the US Dollar and negative for Global equity markets.

ETF Watch: Gains In BBOZ and YANK

Posted on | by Todd | Leave a Comment on ETF Watch: Gains In BBOZ and YANK

As the AUD/USD broke down through the .7600 support level, and the XJO dropped over 1% on the day, the two biggest gainers in the local ETF market were BBOZ and YANK.

The BBOZ is an ASX listed inverse Exchange Traded Fund tied to the local share market, which means the price of the shares rose over 2% to $18.05 as the shares on the  XJO index traded lower.

Similarly, the YANK is an inverse fund based on the price of the AUD/USD. It has a weighting of 2.5%.

As such, shares of the YANK ETF rose 3.15% to $14.60 as the price of the AUD/USD fell close to 1.5% to .7550.

Chart – BBOZ
Chart – YANK

 

 

Yellen Signals A Rate Hike

Posted on | by Todd | Leave a Comment on Yellen Signals A Rate Hike

In remarks earlier today, Fed President Janet Yellen indicated a readiness to raise the US funds rate at the FOMC’s March 14-15 meeting.

In fairly explicit language, she said that as long as “employment and inflation are continuing to evolve in line with expectations”, “a further adjustment of the federal funds rate would likely be appropriate”.

As a result, we now see a hike at the March meeting as close to a done deal, and see the market probability raised to 95%.

Considering the fact that the Fed Funds futures contract was reflecting a probability of around 30% just over a week ago, this has been a very sharp turn in policy sentiment.

As a result, US 10-year yields touched 2.52%; close to a 3-month high.

In typical market conditions, a US rate hike is Bullish for the US Dollar and Bearish for Stocks, Commodities and Crude Oil

Chart -Dow Jones
Chart – OOO (Oil ETF)

 

Four Stocks Driving The DOW

Posted on | by Todd | Leave a Comment on Four Stocks Driving The DOW

Since February 2nd, when the DOW Jones 30 index crossed above 20,000, four individual DOW components have been responsible for over 500 points of the gains which lifted the index up to today’s close of 21, 115.

These four shares are Goldman Sachs (160 DOW points), Boeing (150 points), 3M (110 points) and Apple (80 points)

Not surprisingly, these four companies stand to benefit from the three most broad policy measures from the Trump administration: Infrastructure expansion, tax reform and financial deregulation.

However, against the backdrop of today’s stock market rally, US interest rate markets are beginning to aggressively price in an increase in the Fed Funds rates at this month’s FOMC meeting.

As of last Friday, the odds that the FED would lift rates on March 15th were 30%. At the close of trade today, the odds have soared to 82% with the yields on the US 2-year notes reaching a 9-year high of 1.30%.

Much of this price increase has been prompted by comments from voting FED Governors; who have been uncharacteristically direct in their concern about waiting too long to normalise rates.

Mr Trump’s Speech

Posted on | by Todd | Leave a Comment on Mr Trump’s Speech

On February 9th, President Trump jarred the US stock market by saying he was going to make a “phenomenal” tax announcement in a few weeks.

A few weeks are up, and Mr Trump will be speaking to a joint session of Congress at around 1pm Sydney time today.

Since Mr Trump’s original announcement , the SP 500 has gained over 60 points , or close to 3.5%, largely on three key policy expectations:  tax reform, aggressive infrastructure spending and a more business-friendly approach to market regulation.

Considering the unprecedented nature of today’s speech, it’s difficult to precisely gauge the amount of time Mr Trump will spend on these economic policy initiatives and the level of detail he will provide.

It is very likely that the market will react sharply to any comments on the timing of tax reform. This includes comments about the Border Adjustment Tax (BAT); which has not been popular with retail and banking stocks.

In the lead up to today’s speech, administration officials have watered down some of the dynamics of these three  policy measures. Despite this lowering of expectations, the US stock market has still traded at elevated levels relative to earnings valuations.

On balance, we believe that Mr Trump’s speech will fall short of “phenomenal” with respect to the specific details of tax reform for US corporations and individuals. Technically, the DOW, SP 500 and the NASDAQ are all overdue for a correction.

Whether today’s speech marks the beginning of this correction depends on the degree of detail that Mr Trump provides about these three key policy measures.