Opportunity to buy the dip as risk sentiment weakens

27. jan. 2020 | 5 Læsetid

Media is of course the winner as the corona virus started to spread. This as they can write column after column about the deadly virus and how China manages to build a new hospital with 1,000 beds in a week…and so on.

Media is of course the winner as the corona virus started to spread. This as they can write column after column about the deadly virus and how China manages to build a new hospital with 1,000 beds in a week…and so on. Nevertheless, it is still too early to draw any definite conclusions about the spread of the coronavirus. From a prevalence-perspective, it is bad news that the virus seems to be able to spread from people who not yet have shown symptoms of disease. Also, China’s statics on number of diseased people is also likely to be understated, simply because there is no way to diagnose a cause of death related to pneumonia.

Epidemiologists discuss how rapid the spread is in the form of the R factor. The higher the R-factor, the faster the spread is:

As of now, an R-factor of 2.5-3.8 is suggested for the corona virus. This puts the virus in the same class as other rapidly spreading viruses such as SARS.
On the other hand, there is the possibility to isolate the virus and thus constrain the spreading. The question is how quick the pharmaceutical companies can come up with an effective vaccine…where some six months is a good guestimate.

Instead of speculating, it is better in these situations to read how the market perceives the threat and act from it. Clearly, the risk on-sentiment has been going down. However, many investors still see dips as good opportunities to buy. Also, so far central banks have always come to the rescue, ever since the Lehman crash in 2008.

In the graph below one can see how the Shanghai Index (blue) as well as Hang Seng (red) Index is spreading apart from S&P 500 (orange) as well as DAX (purple) and OMXS30 (green):

PHYG being the ETF for junk bonds in the US market is a good measurement of the risk sentiment. As can be seen in the weekly graph below, the willingness to take on risk has declined:

Also, according to the latest statistics the Fed reduced its balance sheet last week, which is always a bad signal:

The number of companies in the S&P 500 index that have reported their Q4 figures so far has increased from 44 to 85 since last week. The share of companies reporting better than expected has decreased marginally, from 70 to 68 percent.

The best report-performing sector so far is Technology with all (100%) of the Q4 results reported better than expected. Cyclical consumer goods have also reported good figures with 89 percent better than forecasted.

The worst performing sector in terms of profit outcome relative to forecast is Energy with 50 percent better than expected. For the relatively large financial sector, 55 percent has reported better than expected.

Overall, 65 percent of all companies has reported better-than-expected revenues, with the negative deviation being the greatest for the commodity sector, followed by industrials. After all, the economic slowdown is visible in statistics.

During Friday´s trading, S&P 500 fell 0,9% - the largest negative movement in weeks. The index also closed below EMA9 and MACD has generated a weak sell-signal: 

A rising MA20 is acting as support on the downside and in the one hour-graph below, MA100 is still standing:

In case of a break to the downside, MA200 around the 3 250-level serves as the next support. As previously mentioned, perhaps this may be a good time to buy some in the dip.

For Nasdaq, EMA9 still hold but momentum is losing ground:

In case of a break to the downside, MA20 serves as the next support level around 8 970.

Sandvik, one of the first companies reporting Q4 figures in Sweden

In Sweden, Sandvik exceeded market expectations slightly in terms of sales and earnings, while order intake was lower than expected for the fourth quarter of 2019. In absolute terms, order intake was down 6 percent in Q4 / 2019 and two percent in the full year 2019 excluding currency and structural effects, where the weak Swedish krona raised order bookings by four percent in SEK. For Machining Solutions linked to the engineering sector, order intake was down by 10 per cent in currency terms in Q4 / 2019, while the corresponding figure was negative seven per cent for the mining-segment (Mining and Rock Technology). In terms of profitability, the Sandvik Group is holding up well and margins have improved during 2019.

As can be seen in the graph above, the Sandvik stock is losing momentum and a negative divergence between the share and MACD has appeared. In case of a break below MA50 and the rising trendline, the SEK 175-level followed by MA100 around SEK170 serves as a support. 

Keep an eye on Ericsson

Ericsson delivered sales in Q4 / 2019 roughly in line with market expectations, while adjusted operating profit was lower than expected. The telecom company forecasts a 4 percent growth for the RAN market (equipment for radio access networks) for the full year 2020.

The share also gapped down quite sharply on the report. Some of the losses was recovered during the intraday trading. Today will give better insight in what is to come – If today´s trading end on plus, the probabilities of the gap to be closed increase significantly.

The reporting season intensifies in Sweden, likely to move OMXS3

This week, more reports from Swedish OMXS30-companies will be released. Industrials, including Sandvik, went strong last Friday after the European Manufacturing PMI figures exceeded expectations; 47.8 compared with forecasts of 46.8 for the Eurozone and 51.1 in Germany compared with 50.5. This strengthens the investors who are betting on that the downward trend of the profits for the Swedish engineering companies are now approaching the final phase. But if Sandvik is representative for the sector, at least Q1/2020 will be a continued quarter of downward trend.

As shown in the graph above, OMXS struggles to find a direction as EMA9 and MA20 is flattening out. The outcome from the reporting companies is also likely to drive the index, up or down.

Sluggish trading in DAX, but more reports are coming up

The trading has been sluggish in DAX in a narrow trading range ahead of this week when Deutsche Bank and SAP is set to release their reports. The index is trading above its rising EMA9 and MA20 serving as support, but similar to OMXS30 – the report season is likely to drive also the DAX index.

Still downside in EUR/USD

The USD has strengthened against the euro. If the corona virus continues to interfere with the risk sentiment, a likely scenario is a continued strength in USD causing further downside to the trading currency pair EUR/USD.

The first support level around 1.1 is getting closer. In case of a break, the next level can be found around 1.095 followed by a previous low from September/October 2019.

The Corona virus reduce demand for jet fuel

Price on WTI-oil has fallen quite dramatically, partly due to the corona virus and fears for reduced traveling. Reduced traveling results in falling demand for jet fuel. As shown in the graph below, oil is trading at a support level made up by Fib 23.6. In case of a break to the downside, the next level can be found between 52 and 51 USD/barrel: