What to buy in a Bear market?

What to buy in a Bear market?

21 February 2022 from CarlsquareReading time: 9 minutes

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

 

As January goes, so does the year...or

We have seen a share price decline in January and so far also in February. Some are beginning to recall, "As goes, January, so goes the year." When the first month is green, it bodes well for the rest of the year and vice versa. Measured since 1950, when S&P 500 was green in January, the index was on average up 11,9% for the rest of the year. The index only rose by 1.7% during the remaining eleven months when January was red.

S&P500 Seasonality Index, January and the remainder of the year since 2026

Source: Dimensional Fund Advisors LP

But since 2003, the January trend seems to have been broken. Since then, stocks have done quite well, following a weak January. Eight of nine past times, January saw stock prices lower the final eleven months finished higher.

A weak January triggered more volatility in 2015, 2016, and 2020. 2016 is the most extreme example of these years, with a 5.0% loss in the S&P500 index in January, while finishing at +13.0 percent for the whole year. The increased volatility following a weak January has also been confirmed in the current downturn starting from December 27, 2021.

Perhaps we should be more concerned that February also looks to be a negative month for the stock markets this year. The New Times Seasonal Index below shows February has been the third strongest stock market month of the year with a 2.9% return, only surpassed by December with plus 4.3%, and May with a 3.2% average gain.

Average monthly returns on the New York Stock Exchange during the last 20 years

Source: https://charts.equityclock.com/the-new-york-times-company-nysenyt-seasonal-chart

What to buy in a Bear market…

When we are in a bear market, investors look for hedge instruments. Something that doesn't correlate with the stock market and can rise when the stock market falls. Vontobel offers its "short" instruments that are all good hedges as they increase in value if the underlying asset decreases in value.

A way to find hedges, or reallocate risk exposure, is to look at assets with negative covariance to the general market. Beta is a classic figure that shows this. A Beta value of 1 indicates that the sector has been moving in line with the market with 1:1. A Beta value lower than 1 indicates that the sector has been moving in the same direction as the market but less. A Beta value higher than 1 indicates that the sector has been moving in the same direction as the market but more. A negative beta means that the industry moves opposite the general stock market.

Source: S&P Capital IQ and Carlsquare

Above is a table with the 11 GICS sectors in the S&P500 index and their Beta values over 5, 4, and 1 year plus the average. Utilities and consumer staples have the lowest average Beta values, while materials and consumer discretionary have the highest averages. Note that all betas are above 0, meaning that increasing exposure to a specific sector is not a good hedge, more a matter of risk allocation.

…perhaps VIX?

VIX is perhaps one of the more well-known hedges against significant short-term moves. Its value tends to increase as the stock market falls. Well worth mentioning is that VIX tends to make more significant moves than, e.g., S&P 500 – something that one must consider.

VIX, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

…perhaps gold?

If we look at gold, this precious metal is said to work as a hedge during downturns in the stock market. In reality, this is true as a short-term hedge (but more long-term than VIX). For example, the latest upturn in gold price is due to Russia/Ukraine uncertainty. In the daily chart, gold seems to be on its way up to the ceiling of a rising trendline. However, note that a scary Doji emerged on Friday, implying uncertainty of the next move.

Gold, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, gold is approaching Fibonacci 61.8 under rising momentum

Gold, weekly five-year price graph

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

Looking at gold along with the two-year US Treasury yield, one may suspect that gold over time instead seems to benefit from falling yields than moves on the stock market.

Gold and two years US yield January 2008 to February 2022

Source: Refinitiv Eikon and Carlsquare

During the last three years, gold and EUR/USD have had a high correlation in their trading. It is related to the purchasing power of investors. As the USD fall in value, the purchasing power of investors with another local currency increase, and vice versa.

Source: Refinitiv Eikon and Carlsquare

Note the spread since October. It is likely to be related to inflation and Russia/Ukraine uncertainty.

But where is EUR/USD heading?

The EUR/USD has been consolidating since November 2021. On Friday, the currency pair closed below MA50 as MACD recently generated a weak sell signal. Thus, the risk seems to be on the downside.

EUR/USD, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

EUR/USD, weekly five-year price graph

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

Oil cut losses from EUR/USD. Does oil have more to give?

Oil is another asset correlated to the USD with the same rationale as gold. Since the beginning of 2021, the oil price has spread apart from the EUR/USD. The spread is likely related to supply and demand expectations not matching as there are few no oil investments.

Source: Refinitiv Eikon and Carlsquare

Brent oil below has, however, lost momentum as visualized by MACD. A break below MA20 and Fibonacci 23.6 can trigger more selling with a possible 85 USD/barrel target price.

Brent oil price graph, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

However, we find a positive sign in the weekly chart. Note that the falling trend in MACD is broken.

Brent oil, price weekly five-year price graph

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

An oil price arbitrage pointing to Moscow

Oil prices and other rising commodity prices have caused inflation rates to soar. Investors turned nervous about rising interest rates (partially but not fully realized so far). But there is another argument: When oil prices are high, money pours into the Norwegian, Russian, and Saudi Arabian (and other oil countries) coffers. Money that these governments historically often have re-invested in the global stock markets. But at the moment, the oil money seems to be going to military rearmament instead.

Moscow, Oslo, S&P500, and Tadawul stock indices from March 2019 to February 2022

Source: Refinitiv Eikon

The three exchanges started to rise around March 2020 after an initial fall due to Covid (in line with other stock exchanges worldwide). Oslo, and Tadawul (Saudi Arabia) continued to rise from December 2021, when the current price decline began on the US and European stock exchanges. We have also inserted the crude oil price as a benchmark in the graph above.

The Moscow stock exchange turned downwards in mid-January, while the Oslo and Saudi Arabian stock exchanges rose. Russia's threat of war against Ukraine has brought down the Moscow stock market. Should the security situation calm down, the Moscow stock market could catch up with the Oslo and Tadawul indices.

Compared to the contribution of oil revenues to economic growth in these oil-dependent countries, the stock market rise in Oslo and Riyadh remains comparatively small. Fundamentally, there should be more to gain.

Geopolitical uncertainty creates volatility in S&P 500

The daily news around Russia and Ukraine is moving the stock market up and down. Thus it is more than challenging to trade stock indices at this time. S&P 500 closed last Friday below Fibonacci 23.6. MACD just recently generated a weak sell signal in red territories. From a technical perspective, the risk is on the downside. Please note that US stock markets are closed today, Monday, February 21, for Presidents Day).

S&P 500 index graph, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, the index closed below MA50. Is 4 200 next?

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 testing the 14 000-level

Nasdaq is testing the support at 14 000. Note how the index was trading below this level intraday on Friday. MACD has also generated a weak sell signal in the red territories. Again, from a technical point of view, the risk is found on the downside.

Nasdaq 100, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, MACD has generated a sell signal. The next level on the downside following the 14 000-level is 13 000, where Fibonacci 38.2 and MA100 meet up.

Nasdaq 100, weekly five-year price graph

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

The Q4 2021 reporting season

With 84% of S&P500 companies reporting their Q4/2021 results, 78% of report outcomes are still better than analysts' forecasts. The higher-than-expected share has increased from 76 percent last week to 78 percent in revenue.

As measured by earnings outcomes relative to forecasts, the best sector is Technology with 87 percent, Industrials with 85 percent, and Healthcare with 83 percent. The worst performing sector is Utilities with only 44 percent of results better than expected, and the second worst in Basic Materials with 58 percent of results exceeding forecasts. 

Meanwhile, 50 S&P companies have guided down their earnings outlook for Q1/2022, while only 22 companies have guided up their earnings forecasts. So, it may be business as usual - first US companies guide down their earnings outlook for the coming quarter. Then they beat analysts' new lower forecasts once Q1/2022 actual figures are released.

For Q1/2022, Wall Street analysts are predicting earnings growth of 5.2% and revenue growth of 10.3% for all companies in the S&P500 index

Although the gap between share price performance and earnings growth has narrowed, we have still seen a p/e-multiple expansion since March 2020, when the Covid pandemic broke out.

S&P500 Change in forwarding 12 months EPS versus change in price ten years

Source: Factset

Microsoft below MA200. What is next?

Microsoft shares closed Friday below MA200 for the second day in a row. Will the stock keep falling to the support level of 280 USD?

Microsoft share price graph, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, Microsoft is testing rising MA50.

Microsoft, weekly five-year price graph

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

Is OMXS30 breaking out of range?

Swedish OMXS30 closed well below the floor of the trading range. Today's trading will be essential to see if it is a fake breakout. The stock market direction is currently highly connected to the news flow around the Russia/Ukraine situation.

OMXS30 graph, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

Luckily there is support relatively close to Friday's closing price in the weekly chart around 2 184, where Fibonacci 23.6 meets up.

OMXS30, weekly five-year price graph

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

DAX is still in the range

German DAX is still in the range but closed just on the floor. Will it hold?

DAX, July 22, 2021, to February 18, 2022

Source: Refinitiv Eikon and Carlsquare

For DAX Fibonacci, 23.6 appears at 14 400 in the weekly chart.

DAX, weekly five-year price graph

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

 

The full name for abbreviations used in the previous text:

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.

28/06/2022 21:06:28

 

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