Mostly strong reports last week, but discounted in valuations

Mostly strong reports last week, but discounted in valuations

25. lokakuuta 2021 - Carlsquare

In this weekly trading note from Carlsquare, we elaborate on the following topics, indices, and stocks:

  1. Mostly strong reports last week, but discounted in valuations
  2. Interest rates and risk premiums on the rise
  3. Doji in S&P 500 imply uncertainty
  4. Nasdaq falling behind
  5. Can 925 USD be squeezed out of Tesla?
  6. Is OMXS30 a runner up?
  7. Report not enough fuel for Volvo to break up
  8. DAX is struggling
  9. EUR/USD testing a falling trend channel
  10. Copper

Mostly strong reports last week, but discounted in valuations

The S&P500 index advanced 1.6% last week. After seven days of uninterrupted gains, a minor rebound to the downside occurred on Friday, October 22. Although 84% of US company reports were better than expected in terms of earnings and revenues exceeded expectations in 79% of cases, analysts have on average revised down their Q4 2021 earnings forecasts by 3.2%. On Thursday, October 21, New York Stock Exchange investors showed no mercy with Snap, failing to live up to expectations. Instead, what turned sentiment positive again on Thursday night was that Chinese real estate company Evergrande managed to pay off a loan at the last minute.              

Although the companies' earnings performance is consistently strong and management reports an excellent economic climate, investors have already discounted this. The S&P500 index has outperformed the companies' earnings performance by 27% from the Covid outbreak and the March 2020 share price drop, illustrated in the graph below.

S&P500 Change in Forward 12-month EPS versus Change in Price.10 years

Source: Earnings Insight, FactSet.

The OMX30 followed in the footsteps of the S&P500 last week with a total gain of almost 1.5%. One difference, however, was that a large part of the gain came on Friday (+1.0%). In contrast, the DAX fell at the start of the week. It failed to fully recover this decline, ending down 0.3% at the close of the market on Friday evening.

Last week, several major engineering companies in the OMXS30 index reported, including ABB, Atlas Copco, Sandvik, and Volvo. Volvo was surprised positively in terms of result, while Atlas Copco worsened and ABB and Sandvik were in line with expectations. Order intake exceeded expectations in the case of ABB, Atlas Copco, and Sandvik, but not for Volvo's trucks. Geographically, the demand looks strong across all regions in the engineering industry. ABB believes that supply disruptions have influenced customers to place somewhat larger orders than they need. Delayed deliveries are likely to continue to affect the industry also in Q4 2021.

Interest rates and risk premiums on the rise

The US 10-year Treasury yield rose from 1.57 per cent on Friday, October 15, to 1.64 per cent on Friday, October 22, after having peaked at 1.696 per cent on Thursday, October 21. As can be seen in the graph below, the US 10-year yield has risen in roughly two-week waves with 10-15 basis points higher each time. What drives this is most likely inflation expectations.

US 10-year yield from March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

More serious for the stock market, HYG, the junk bond ETF on the New York Stock Exchange, is showing a downward trend. That reflects investors' risk appetite and usually precedes stock market movements. In other words, investors are currently increasing their risk premiums. The market value of bonds is more sensitive to interest changes than stocks.

HYG daily chart, March 18 from October 22, 2021

Source: Refinitiv Eikon and Carlsquare

Doji in S&P 500 imply uncertainty

As shown in the graph below, S&P 500 has set a new all-time-high with a small margin under rising momentum, as demonstrated by MACD. However, a scary-looking doji was created during Friday's trading, implying uncertainty:

S&P 500 Index graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, the MACD-line is rising, but it has yet to cross the signal line. The histogram visualizes the difference between the two. When the histogram turns positive, one may say that a "weak buy signal" has been generated.

S&P 500, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Nasdaq falling behind

Nasdaq 100 is falling behind again as there is still some to go until previous highs are reached. Rising interest rates are, in a way, more negatively affecting Nasdaq constituents than S&P 500 constituents, which are one factor explaining the outcome.

Nasdaq 100 daily graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, the MACD-line has not managed to start to rise. The negative divergence between the index and MACD remains:

Nasdaq 100, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Can 925 USD be squeezed out of Tesla?

Tesla was flying and set a new all-time high last week. RSI is overbought, and a phase of consolidation is well needed. Perhaps the share can be pushed upwards towards the 925 USD level, implied by the extended Fibonacci sequence.

Tesla daily share price graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

Tesla, weekly five-year share price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Is OMXS30 a runner up?

OMXS30 managed to break up above strong resistance in the shape of MA50 and MA100 on Friday as momentum is rising. Now, the next level to break on the upside can be found around 2 365:

OMXS30 daily price graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, one can also see how the index has regained EMA9 and MA20.

However, MACD is falling and thus not cheering on:

OMXS30, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Report not enough fuel for Volvo to break up

Volvo is testing resistance in the shape of a falling trendline, MA200 and MA100. Last week's report was not enough. Is a setback in the cards?

Volvo daily share price graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, the MACD-line has not managed to start to rise. The negative divergence between the index and MACD remains:

Volvo, weekly five-year share price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

DAX is struggling

The German DAX index is struggling to break above MA50 and MA100. Nevertheless, MACD has with a small margin, generated a buy signal:

DAX daily price graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

The struggle is also made visible in the weekly graph as the index still has to retake MA20. EMA9 is retaken with a small margin:

DAX, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

EUR/USD testing a falling trend channel

As shown in the chart below, the EUR/USD is testing the ceiling of the falling trend channel. The currency pair is supported by a rising EMA9. MACD is on the rise. Next is MA50, currently trading at 1.17:

EUR/USD daily graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart below, one can see how the currency pair is approaching the falling EMA9:

EUR/USD, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Copper

Copper forward price fell last week and is now trading below EMA9. Fibonacci 50 around 4.42 USD may be next:

Copper forward price daily graph, March 18 to October 22, 2021

Source: Refinitiv Eikon and Carlsquare

Copper, weekly five-year forward price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Full name for abbreviations used in previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence

Important notice

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.

30.11.2021 21:59:54

 

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