Investment Idea

The warning lights has changed from green to flashing red

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02/11/2020 | 5 min read
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Most point to sharp increase in the number of infections in Covid-19 and lockdowns as the reason why the stock markets are falling. We believe that at least as much is related to the US election. Most people learned a lesson in 2016, when Trump despite being behind in most opinion polls, still won the election. No one wants to stay long for the next few days. But it also means that it is profitable to sell volatility right now when everyone buys insurance…

Most point to sharp increase in the number of infections in Covid-19 and lockdowns as the reason why the stock markets are falling. We believe that at least as much is related to the US election. Most people learned a lesson in 2016, when Trump despite being behind in most opinion polls, still won the election. No one wants to stay long for the next few days. But it also means that it is profitable to sell volatility right now when everyone buys insurance…


The graph shows the number of infections in Covid-19, globally and it shows a steady increase.


If you zoom in on Sweden, a second wave of infection is clearly visible, and the force is higher than during the spring outbreak.


The same is seen in Germany. The waves do not look as organic at all, which reflects a successful management of the spread of the infection following the first outbreak.


In the US, the curves are different. It looks more like a third wave that breaks out when the schools open and the autumn provides a greater breeding ground for the spread of the infection. The severe lockdowns that are imposed globally will probably push down these waves as well, so we have a bit of a challenge falling into the general picture that it is the spread of Covid 19 that is suddenly causing the stock market to fall.

More reasonable is to link the recent downturn to the US presidential election.


Most news commentators have told themselves that Joe Biden will win the election of November 3. However, President Trump has moved forward lately and gained ground after the latest TV debate between the two candidates. Even though it seems almost impossible for him to be re-elected when studying the opinion polls, there are two important things to keep in mind.

Firstly, it is a known effect since the 2016 election that a lot of people who voted for Trump did not want to state this in opinion polls since they would be ashamed of it. That effect is difficult to measure. (One way is to ask the caller how he thinks his friends would vote for).

We have written about the second source of error countless times now. There is a risk that both sides will appeal an even election result. There is no trace left of sportsmanship in this race so expect both sides to use all available means to win. An appeal will be lodged on 14 December. On the same day, the electors appointed in each state shall indicate who they will vote for. It is now legal for them to vote for the candidate who won in the constituency, but the penalties are low. The pressure can be significant on individual electors. This may be especially true for Trump, but there is also a campaign against Biden where more evidence is being gathered that his son may have received illicit benefits.


Regardless of the outcome, it is a sadly divided United States that emerges where the west and east coast with the political elite are pro Biden while the central United States is more pro Trump. This is not an election that unites the country, on the contrary, the contradictions and riots are likely to continue or even increase in scope.

The Q3 reporting season Reports for the third quarter among the S&P 500 companies continue to come in better than expected. Now, 63 percent of a total of 506 companies have reported. We still have very high figures for positive surprises; 86 percent in terms of earnings and 81 percent when it comes to revenues. The best sector in terms of positive profit surprises is Raw Materials, with all 16 companies on the right side of the line. Other strong sectors are Consumer Goods (95 and 93 percent for cyclical and non-cyclical respectively), Healthcare with 93 percent and Industry with 91 percent. The worst sectors in terms of profit outcome relative to expectations are Energy with 75 percent and Real Estate with only 61 percent better than anticipated.


At the end of last week, four of the FANG giants were up to proof with their Q3 results. The reception was mixed in a market that was also in a recoil phase. The table below shows how much the analysts has revised the company’s profit forecasts over the next 30 days.


Falling stock markets and rising interest rates are a toxic combo. Is it really a buying opportunity that has been created?


The S&P 500 is down to its previous support levels. The MA200 acts as both a magnet and a support. Note that the MACD has broken down to a sell signal.


A gap has been created in the 2-hour graph.


The weekly graph shows how the S&P500 is traded on support.

The VIX index has risen sharply over the past three trading days.


If you look at the historical trend, you can see that the current rise in VIX is an outlier. VIX around 40-50 are extreme readings. Anyone who wants can sell options if they prefer to go against the current risk aversion, which reflects that everyone suddenly wants to buy insurance. It is not more than a couple of weeks ago that the opposite was true and VIX was traded at the lower Bollinger Band in the daily graph.


On the positive side, there is also the fact that HYG, which reflects the development of corporate bonds, continues to trade on support and, unlike the S&P500, does not create a lower peak. In fact, the trend is still rising. Of course, the support must also hold…


China looks set to continue pumping support into the stock market. It is important that the support holds.


The big changes occurring is found in the USD and tech sector. Above is the USD that has broken out of the falling channel.

For the pair EUR/USD, MA100 is struggling to hold. In case of a break to the downside, the next level can be found around 1,15 where Fibonacci 38.2 meet up:


Below is the development for Nasdaq, which is trading close to support in form of MA100 and Fibonacci 23.6. Note the sell signal in MACD. In case of a continued decline, the next level can be found around 10 745:


The reports for the FANG companies were not received graciously and all stocks fell but Google.


It looks as the Google share is heading for the old top. But a little warning finger- it´s never nice with black candles because they show that bears have taken over during the last trading day.

The development of the Apple share has been exceptional strong, but the exponential rise in the montly graph is broken.


In the daily graph, the share falls through an important support line. MA100 remains intact. In case of a break to the downside, Fibonacci 50 around 98.6 USD serves as the next level.

Amazon stock leaves a blood-red candle behind and closed Friday’s trading below MA100. The next level on the downside is found around 2 890 USD where Fibonacci 38.2 meet up:


In Sweden OMXS30 index closed Friday’s trading slightly up and is corrently hoovering right above support in form of MA200. Mommentum is negative and falling as shown by MACD:


The German DAX index continues to fall but closed Friday just upp from support in the shape of Fibonacci 38.2. DAX put up with a triple negative effect when the US stock market falls at the same time as interest rates and the Euro strengthens. Anyone who likes to catch falling knives can go in here, but we would wait until a clear bottom has been established.


Gold is an interesting safe haven. It is a continued consolidation in a falling wedge. Sooner or later there will be an outbreak and given all global worries, interest in gold is likely to rise long term.


Bitcoin is on the move. As shown in the weekly graph the currency closed above Fibonacci 61.8. The next level on the upside can be found around 16 230:



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