A new deal can set a new trend in the coming week

22. mar. 2021 | 5 Læsetid

For a long time, it seemed that the stock market was immune to the Corona infection. We wrote about the Corona virus already on January 21, 2020 when we raised the question of whether it could be a threat to the stock exchanges as well. The big issue for the day then were the trade agreement between the United States and China and the riots in Hong Kong.

For a long time, it seemed that the stock market was immune to the Corona infection. We wrote about the Corona virus already on January 21, 2020 when we raised the question of whether it could be a threat to the stock exchanges as well. The big issue for the day then were the trade agreement between the United States and China and the riots in Hong Kong. This is news that has completely disappeared from the radar screen due to the development of the virus. It took quite exactly one month until the Corona pandemic began to be noticed on the price development on the major stock exchanges and the fall began.

It has now been a year since the bottom of last year’s stock market crash. Massive financial support from central banks has caused stock markets to rise. Momentum is still on the upside.  

It is the shares that have fallen the most that have also risen the most since that. A good example is Freeport-McMoRan, which is one of the world’s largest mining companies. A share that falls 80 percent must rise 400 percent to regain the price fall, which has also happened in many cases.

It is the smallest shares and those with the lowest valuation that are usually hit in panic situations like these. Such stocks also have the most to recover from the bottom. It is really an upside-down world for us fundamentally interested.

Friday´s stock market, however, gave a warning that not everything may go straight up in the sky. It was quadruple witching last Friday, which is a day when options on the US stock exchanges are rolled out on a larger scale. These days provide little guidance for trade, but it is the following days that are more interesting. Then last month´s deal has been closed, new cards have been dealt and the market is taking charge of a new round.

The Fed announced on Friday that the investment banks will not be allowed to extend the SLRs. This means that they cannot have as high leverage on their positions as before. It was expected that the Fed would give them an extended mandate, but this will now expire. It can affect liquidity and risk appetite on the margin. But there is hardly anyone who can calculate the effects in advance. Central banks and states remain on their toes to squeeze money into the system.

But do not forget to monitor developments in China. The country has an eerie tendency to be a guide for the rest of the world with a few months delay. Why is unclear, but the Chinese have fallen back to a dictatorship under Xi Jinping who has ruled the country since 2012. Ten years ago, one could still follow the events in the country by reading news from China carefully and following more marginally blogs. But today it is an almost impossible task.

What can be seen on the surface is, in any case, that China, partly with the help of Covid 19, has taken control of Hong Kong. Now China´s leaders is dismantling the large conglomerates around Jack Ma as Alibaba to reduce their market dominance. The same development is under way in the US against the FANG companies, so it will be interesting to see if China gives strength to this development or not.

With President Trump off the stage, it is also interesting to follow the development in the US-China relations that is on the verge of collapsing. With Joe Biden at the helm, at least we see a weak hand on the side of the United States that the Chinese are skilled at taking advantage of, even if it is too early to draw any conclusions.  

Rising interest rates always hit developing countries and their stock markets hardest.

In China, we see how interest rates are now rising back toward long-term levels in recent decades. It all happens while the economy is recovering. On the surface, fantastic growth figures are being reported. However, the testimonies that are leaking out of China speak of a tough reality where employees have not been paid for several months and entire industrial sectors are being knocked out. It is difficult to know if this is a local phenomenon where China is losing competitiveness against other countries or if it is an indication of what is to come in other economies.

For the stock market, however, it is important to keep an eye on the horizon. Even if the economies get a double dip, which is highly likely, the central banks have so far parried it with additional support, which has benefitted the stock market.

The Shanghai Stock Exchange is trading well above the levels before Covid 19:

If we zoom in, we see how the index is down at MA200 and possibly breaking out of the falling trend. This is an extremely important graph to keep track of!

Another graph that should be clearly visible on the stock market screen is the development for HYG and JNK in the US, which shows the market for risk capital. It still clings to the support which is the neckline in a head-and-shoulder formation. A break of this indicates a decline towards 84-85 where MA200 meets up. This graph can provide valuable information when they start trading today Monday March 22, the first day after quadruple witching on Friday.

The S&P500-index is working its way upwards in a rising channel. MA20 serves as a support on the downside, followed by MA50 and the rising trendline:

Nasdaq has not been able to take advantage of its momentum and is falling back. If the symmetries continue to work (dotted lines), the support will be challenged again. Today´s trading will be telling:

One aspect that should not be forgotten is that the US stock markets are often weak just before the reporting season starts in earnest. So far, Fedex has issued a quarterly report that was received with a sharp share price rise.

The Fedex share rose 6 percent in a company report that showed continued growth in the e-commerce economy.

The Nike share on the other hand, fell by 3 percent after reporting that the company's sales had decreased by 10 percent compared with the same period last year. The company will therefore reduce its workforce. In other words, the economy remains divided.

Amazon stock did not manage to break up above MA200 and is currently pushed downwards by MA20. Is the 2 950 USD-level next?

The Tesla stock is trying to break up above both MA20 and MA100. Today’s trading will be important. In case of a break to the upside, the next level is made up by MA50 currently trading right above 770 USD:

Both Amazon and Tesla will release its Q1 2021 numbers at the end of April. So far eight out of 504 S&P 500 companies have reported their Q1 2021 results. 88 percent of them have been better than anticipated. But as we stated in the latest weekly letter, expectations for the S&P500 companies’ revenue and profit increases are high ahead of the Q1 2021 reporting season. 1 ½ percent of all companies are also too small a subset to be able to draw any definite conclusions from the forthcoming outcome.

The previous pattern with weakness before the company reports and then strength once they start to be delivered can also apply this time. This means weakness until the US banks release their Q1 2021 reports around mid-April.

In Sweden, the OMXS30 index struggled last week after a strong move upwards. EMA9 and MA20 services as support on the downside:

The 10-year government bond yield in US continue to rise while the 10-year yield in Germany is consolidating. On the other hand, the German yield is still in negative territory while in the US the 10-year yield just passed 1.7 percent. At the same time, the EUR/USD currency pair is once again testing MA200:

The oil price was under pressure on Thursday in fears that an increased spread of Covid-19 should dampen demand for an extended period. Also, India decided to reduce its imports from the OPEC alliance as an act of protest on OPEC’s decision not to increase its production levels. As shown in the graph below, the Brent oil price bounced nicely on Friday’s trading of MA20 as well as Fibonacci 23,6. Will the 65 USD per barrel-level be taken back?