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The past week has been the major Q1 earnings week from Tech Titans such as Amazon , Facebook, Google, Microsoft and Intel. All of the companies have well exceeded their earnings expectations, which lead to large rallies on their stock prices, only to see them faded eventually, in less then 24 hours. The NASDAQ100 Index ended the week lower by 0.3%, while SPX500 is flat for the week. We could not stress further as mentioned since the start of this project that all bounces on US Equity indices should be taken as opportunities to sell or go short as price action has been telling us in the past 5 weeks of forming lower highs, something not seen in the past 3 years.
This price action is not just limited to Tech stocks, but also industrial's such as Boeing which posted blockbuster earnings only to see the stock open higher and lose its gains on the same trading session.
As we have forewarned for caution last week, good news is now bad news as the US Yields rising on good news would hurt equities as equity growth premium would be reduced when risk-free assets yields rises.
This week, we will review on the Nasdaq100, S&P500 equity indices, along side a mentioned on the US 2Y Yield with regards to S&P500 dividend yield on why this time is different, the US Dollar breakout and how we find Silver an attractive asset to own in times of both a sell-off in Equities and Bonds as traditional risk off havens would regain their shine.
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1) Final Bounce in FANGs / NASDAQ, an opportunity to sell
This week saw the Fang Index staging a good bounce after the mid week meltdown when US 10Y yields crossed 3% and met with strong resistance before easing lower. The bounce in Fang was mainly due to the good earnings results from Tech Stocks, with majority of the earnings reported after the market close on Thursday.
Friday price action for Fang and Nasdaq100 is however disappointing, for which major tech stocks opened at highs only to see gains faded within the first hour. Nasdaq100 was up near 2% at the open on Friday but ended the session just up 0.05%, the index down for the week.
We take this as strong conviction of our prediction last week before the major earnings as this is the opportunity we should sell into if earnings were good to add shorts. We seek for more price action clarity next week with expectations that we have seen the final bounce in Nasdaq100 in the past 2 weeks, and call for a move now to Feb18 lows of 6300 levels with a 6 months target of 5000.
News of good earnings results no longer matter as we have said as the weight of the Fangs bubble will likely collapse on its own as higher rates reduce the equity growth premium already priced into the stocks.
Apple and Tesla, the weakest of the Tech Titans is due to report next week which will be fuel for the down move across all major indices given APPL weightage in major indices.
2) Why this time is different? The answer lies in the US 2Y Yield vs S&P500 dividend yield
Much of the talk this week has been on the 10Y yield crossing 3% along side a flattening yield curve on the 2/10. It is interesting to note of the correlation of the SPX500 vs US 2Y Yield since Mid January when the 2Y crosses the 2% mark and have been rising ever since.
The move above 2% coincides with the top of the US equity markets, before the big crash in Feb18 which was mostly relate to the S&P 500 Volatility Index breakout.
The US 2Y Yield closed at 2.484% this week. We take the rise of the short term US yield as the catalyst to stop this bull market in the midst of higher market volatility. Short term 2Y risk free US Government debt now yields 2.5%, compared to current 2018 estimated S&P500 dividend yield of 1.87%. Given higher yields now, it is no longer attractive to buy into growth stocks given the high premium already priced into them. It would make more sense to reduce US Equity exposure now and purchase 2Y paper at a higher yield while letting the market ride on the volatility.
As we have mentioned many times, the Fed is unwilling to change their stance to pause rate hikes here as it would be seen as a negative signal to market participants. Higher energy prices have also kept CPI slightly on range of the Fed's Inflation target, which will only have them hiking further to boosting short term US Yields.
Either way it would be negative for equities due to asset reallocation, while higher rates would put a drag to corporate investments as we wonder how many of the capex that was implemented in the previous decade of low rates would suffer in the current environment of rising rates.
A bond bubble is also in the works of which both a fall in equities and bonds would destroy much of the global wealth we have seen as a result of the Quantitative Easing programmes from Global Central banks.
3.) US Dollar breakout and why we like Silver
The US dollar had a great week as rising US Yields have had USD broke out of its 3 months range. US Dollar Index rose above the 91 level for the first time since mid January 2018. This caused a reversal in the commodity market and put a pulse to the rally in Oil.
The main focus was the 10Y Yield crossing the 3% mark with a sell off in US bonds across the board.
We are now looking at the possibility of a sell off in both the US Bond market ( Resulting in higher yields) and also a sell off in the Equity market. This observance was noticed this week, something which was not seen in years. If this correlation continues, there could be various reasons to this from market positioning, asset reallocation which in the worst case could lead to some speculation of a US Debt Crisis. We think it is wise to seek for a hedge for such a possibility.
We like precious metals here after their sell off this week which had Gold and Silver approaching their lower band again. We done a check on the CME open interest for Silver Futures and have noticed a good improvement from the Managed Money positioning which had flipped from all time record short position to neutral positioning now. Producer short hedging positions have also reverse from the 2016 lows. This was offset by falling Managed Money long positions which have fallen since 2016. Net result was a tight range for Silver in the past 4 years.
We look to see if Managed Money will continue to build their long positions here which would likely be a boost to Silver prices. A breakout above the $18 mark give us an initial target of $22 with possibility of higher levels ahead in an event of risk off or lost of confidence to the US Dollar.
I have had a great week in Bali with the folks, and took some classes for surfing. It was great fun, but the process of going against the large waves when I had to get myself position for the waves again was tough which is a good example to us to always go along side the path of least resistance.
I will end off the week with of course, a bear chart just for laughs.
Good luck trading!
The Big Bear