Market Analysis Archives

Thoughts on the Markets (3 July 22)

Since my last post one week ago, markets have dropped somewhat. S&P is now at 3825, down from 3911.

General Markets

The corrective bounce ran out of steam, and the major equity markets dropped a few percent. There was a rebound in US yesterday, and S&P went up about 1%. However, I doubt the uptick can be sustained, as there has been a constant stream of bad economic news flow applying downward pressure on sentiment.

Earnings season in the US is starting in the 2nd week of July. This is another potential source of downward pressure on equities. There is a significant risk that earnings expectations have not come down enough. If earnings disappointment + negative economic news flow hit the markets together, it would be difficult to avoid another down leg.

Commodities

Commodities are still falling. Below is the chart for copper.

There has been no relief at all for commodities, even with China’s re-opening impulse. The pessimism from the global downturn seems to be overwhelming everything else.

Is there still room for further falls? Let’s take a look at a longer timeframe for copper.

Copper is still above pre-COVID levels. To me, it feels like there is still room for further falls. Of course, things rarely move in a straight line.

Trading Considerations

I am back to favoring shorting commodities, as negative economic news flow has been relentless. Except for China PMIs which have been ok, but their economic stimulus has been underwhelming so far. However, prices have dropped a lot, so a lot of agility is needed to avoid getting caught in any violent rebound.

As for the long side, I still like bonds. Bond yields have dropped somewhat, with 10-year Treasury yields dropping to multi-month lows. Recession fears are the culprit. Just be careful and do not bet huge on junk bonds for their high yields, as recession will still hit low-quality bonds badly.

Take care and good luck!

Thoughts on the Markets (25 Jun 22)

Wall street rebounded massively yesterday, with Dow Jones up more than 800 pts and S&P up about 3%.

General Markets

This has been a good week for the markets. Economic news has actually been bad overall, but there is some hope that inflation is peaking. It is likely that markets rallied due to lowered expectations of rate hikes.

Markets are shifting their focus rather rapidly. Just recently, it was global slowdown fears. This week, it is peaking inflation hope. Next week, would there be a new focus? Perhaps. Earnings slowdown is a possible candidate. Or maybe slowdown fears will triumph again. Market dynamics are changing more quickly these days, making trading more challenging.

Commodities

Commodities have continued to fall despite verbal support for stronger Chinese stimulus. A lot has to with weakening economic data. Copper price is at 16-month lows.

Prices have literally fallen off a cliff after being in a trading range for some time It is possible for prices to continue falling, but the probability of at least a short-term bounce has increased. There are still folks believing in the power of future China stimulus.

Trading Considerations

In my previous update, my preferred short was commodities and long was bonds. Commodities have fallen a lot since, so I would not short it due to increased probability of a bounce. Bond prices have increased slightly, but I am retaining it as my preferred long. It seems likely that the economic slowdown will cap the increase in bond yields going forward.

Iron Ore Market Update (23 Jun 2022)

Iron ore has suddenly become very bearish, going down for 9 consecutive days from 140+ to 110+. Below is the 6-month price chart.

Sentiment seems to have broken down. Prices have gone into fresh 2022 lows. The biggest reason is that the players in the sector were too optimistic on future demand potential. Prices were bid up based on hope, but the hope has been shown to be somewhat misplaced.

There is a decent chance of a bounce at this point, as the drop has been rather drastic. Also, a speech by the Chinese president hinting at stronger stimulus efforts is supportive. A short-covering rally may occur. Thus large short positions are risky now.

Thoughts on the Markets (19 Jun 22)

Markets have extended their extremely bearish behavior last week. S&P posted its worst week since 2020. Bitcoin is crashing as I am writing this post, going below $18k at one time. Bond prices are buckling under severe pressure.

US economic data has deteriorated, contributing to the pessimism. Chinese economic data seems to be doing fine, but it is not enough to offset the prevailing negativity.

Stock prices are starting to look more reasonable, but negative drivers of the markets may not have peaked and turned around yet. Inflation expectations are still awful, and major economies are at risk of substantial slowdown.

Commodities have been rising steadily due to being touted as an inflation hedge, but lately have been hit because of economic recession worries. Shorting commodities may be viable if recession worries do not recede. This is my preferred tactical short bet if I am intending to short the markets, as there is still quite a lot of room for commodity stock prices to fall.

On the other hand, recession worries may actually benefit bonds. If economic data continues to deteriorate and/or inflation data goes lower, bonds would benefit significantly. I like this long bet as bond sentiment is extremely low, but I would be cautious about the timing of any bets as there are still several almost confirmed interest rate hikes coming up.

Anyway, hope you folks are doing ok. Do stay safe and sane, and be rational and keep away from impulsive behavior. Good luck!

Iron Ore Market Update

Iron ore has been rangebound this year, trading between about $120 to $170.

Currently, it is at about $146, roughly in the middle of its 2022 trading range. It has been trending up the last few weeks because of China’s COVID reopening. The reopening and stimulus impulses should support prices for the short-term. Downside risks include Chinese policy response against high commodity prices, and actual commodity demand not meeting expectations.

This is not the optimum setup for shorting. Prices need to go closer to the upper bound of the trading range first, and there should preferably be emerging signs of peaking demand. However, no one can predict the timing of the turnaround in price movement accurately, so we just to constantly monitor news flow and prices. The turnaround can happen anytime, even tomorrow or next year.

Personally, I am hoping for prices to go much higher, as the probability of successful short trades increases the higher prices go. When prices burst above $200 last year, it was a once-in-a-generation type of shorting opportunity. I don’t expect a repeat this year, but if prices can reach at least $180, it would still be an excellent trading opportunity.

State of the Markets (23 May 2022)

Since my last market state update on 13 May, markets have fallen slightly. S&P is now at 3901 vs 3930. There was a bounce, but it was not sustained, and markets fell back.

Drivers of Market Sentiment

How have the main drivers of market sentiment changed? 2 of the main drivers are stated below:

Inflation
- still remains a strong market-driving force
- inflation-related economic indicators have remained high
- Feds remain firm on rate-increase stance
- War goes on, maintaining upward pressure on selected commodities
China slowdown
- sentiment improved
- economic data remains poor
- but re-opening and policy action has given more hope for the future
- china-related stocks and commodities have relatively outperformed

Overall market sentiment remains negative, though there is some improvement thanks to China news flow.

Trading Outlook

Markets are now low enough for some bulls to view as a buying opportunity, especially when coupled with the improvement in Chinese sentiment. However, inflation-related forces remain a strong downdraft. The likelihood of further market retracements is probably still higher than that for sustained rebounds, though the probabilities are more balanced now.

For me, I find it harder to short the markets. The probability of sudden unexplained rebounds has increased. Trading indices are trickier, due to the more balanced upward/downward forces.

In the commodity space, China re-opening, policy easing and the ongoing Ukraine invasion are supporting prices in spite of current weak data points. Furthermore, commodities are seen as good to hold in times of high inflation. Given the abovementioned support for commodity prices, it will probably be difficult to execute commodity and commodity-related equity shorts.

Investing Outlook

The probability of a successful equity investment has actually increased as prices have fallen. However, the central bank tightening impulse is just starting, so there may be even better opportunities awaiting in the equity space. “Expert” sentiment is starting to deteriorate, with more negative opinion pieces and forecasts coming everyday.

I have no equities at the moment, so I will probably wait for lower prices before starting to buy. There is still a good probability of prices going lower. Central bank tightening has only just started, so it is going to remain a significant downward force for some time.

Bonds are still unfavored due to the increasing interest rates. But sentiment may reverse if inflation expectations come down and/or global economic growth starts to slow down more than anticipated. It is somewhat still a contrarian play to increase exposure in bonds.

However, I still feel that bonds have a relevant role to play in an investment portfolio. Thus I actually have increased bond exposure gradually over the last few months, and fortunately they have been holding up. There are many different types of bonds, we need to be selective and choose the appropriate types for the current financial climate.

Rise of COVID in China

closed hanged on door — COVID closing businesses in China

While the world is still transfixed by Ukraine developments, China has reported a significant resurgence in COVID cases. Case loads are still relatively small compared to some other countries. However, the economic effects of anti-COVID measures in China are amplified because of their zero-COVID policy.

Shenzen is already under lockdown. If it spreads, there will certainly be deleterious effects on the Chinese economy and even the global economy. There is no need for major alarm now, but traders need to monitor this closely.

Markets Brush Off Ukraine Invasion

cosmetics makeup brushes and powder dust explosion — Brushing off the invasion of Ukraine

After initial plunges due to the Ukraine invasion, most markets regained composure. S&P ended 1.5% higher, making a spectacular intraday recovery. Asian markets rebounded somewhat in the morning and early afternoon sessions.

Is the invasion really a totally benign event not affecting the global economy at all? Definitely not. There are several good write-ups on it, such as this article from Financial Times and this from The Economic Times. The global economy would take perhaps a 0.2-0.3% GDP hit over the next few years, but risks have increased, especially with the oil/inflation aspect. The situation is definitely worse due to the invasion, but there is still considerable uncertainty regarding how much worse.

More certainty would arrive as the situation develops further within the next few days, weeks or months. If you are confident of the long-term prospects of your stock, it might be a good buying opportunity. Meanwhile, this is a good chance to practice managing greed and fear. Fear was abundant yesterday, but greed has been in play for much of today. Most of the time, giving in to extreme fear or greed will lead to unprofitable outcomes.

Worst-Case Scenario For Ukraine Is Unfolding

soldier holding gun — Photo by Jakson Martins on Pexels.com

Russia has formally launched a military operation in Ukraine. Dow futures are about 500 points off. Stocks are tanking. Gold and oil prices have spiked upwards. In these situations, it is more important than ever to keep your emotions in check, and avoid impulsive actions.

If you can stay logical, do read up as much as you can on this situation, and monitor news flow closely. It will help you determine what stocks to buy and sell, and also the timing to do so.

Conversely, if you feel that your emotions may cloud your judgment, please do the opposite and stay away from media reports on the markets. Do something to distract yourself. But try not to take too long to return to the markets. Opportunities may present themselves during this volatility that may not last long.

Do remember that in addition to asset prices fluctuations, there will also be some changes in stock/industry fundamentals. Thus it will be prudent to revisit the investment/trading cases for the stocks you already have or are interested in acquiring.

Good luck and stay sane!

China Begins To Ease Financial Conditions

man turning on vintage boombox placed on red car — China Starting To Adjust Financial Policies

China has started the easing of financial policies in order to combat a slowdown in economy growth. On Monday, it cut borrowing costs of its medium-term loans. Bond yields fell as bonds became more attractive. Today, it has made more cuts to various lending rates. These moves are intended to increase borrowing by firms and stimulate the Chinese economy.

This could be the start of a period of sustained policy easing, which would stabilize market sentiment for Chinese-related stocks and make it a good entry point for beaten-down stocks. Indeed, HK property and tech stocks have soared. But no one really knows how much policy easing will occur and in what form, as China remains concerned about having too much debt.

This is not an all-clear signal to buy any Chinese-related stock, there still needs to careful select of sectors and stocks which are most likely to take advantage of the stimulus. Do take control of any greed creeping in, catching falling knives is really enticing but some knives may drop further.