Daily Trading Ideas & Tips

#21
What does seasonality tell us about equity markets growth in February?


US consumer confidence ticked higher in January, but details of the Conference Board report showed persistent concerns of households about job opportunities. This suggests weak labor market dynamics could extend into January, following negative NFP surprise in December.

Nonetheless, the Conference Board survey showed that US households remain optimistic and are planning to buy real estate and cars within the next 6 months. The US economy is driven by consumption and the data gives hope that the forecasts for economic expansion in the first quarter will justify elevated equity valuations.

In addition to the feeling of overbought in the market, the bullish trend is at risk due to news background turning less rosy. This is a shift in expectations regarding the US stimulus package (towards a smaller size, ~ $ 1 tn., against the expected $2 tn.), and numerous reports that vaccine manufacturers are delaying supplies, which slows down vaccinations, delaying the start of easing of lockdowns. It is worth to pay attention to seasonality factor, which tells us that equity market grows weakly in February, and on average experiences a correction:





The US consumer sentiment index rose from 87.1 to 89.3 in January. It cannot be ruled out that the main merit came from the $900 billion in aid to the economy which the government approved in December, helping economy to avert a hit to propensity to consumption.

In terms of the report's connection to the labor market, a highly correlated with unemployment rate indicator called labor market differential declined from -1.9 points in December to -3.2 points in January. The correlation with unemployment rate looks really tight:



This useful indicator is calculated on the basis of the attitude of those respondents who believe that there are enough vacancies in the labor market to those who believe that it is difficult to find a job. The decline in the index increases the chances that we will see a negative surprise in Payrolls in February, as happened with the January report. That can be a catalyst for equity market correction.

Worsening expectations for the European economy in line with the latest data on the state of the business climate in Germany, indices of activity in the manufacturing sector and consumer optimism in Germany and France, worsened outlook for European assets. European stocks remain on the defensive, with the Euro down 0.25% against the dollar and about the same against the pound. German GFk Consumer Confidence Index fell from -7.5 to -15.6, indicating an increase in deflation risks. French consumers were also disappointed by the outlook for personal incomes with the index falling short of market expectations in January.

Oil prices were supported by API data, as well as Chinese statistics on new cases of Covid-19, which showed a further decline, thus reducing the risk of new lockdowns. If the EIA data confirms the API estimate for reserves, the price of WTI is likely to try to test $53 today, in part thanks to momentum from Tuesday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
#22
Why stock markets can fall further, but not for long


The US dollar extends bullish correction entirely on the back of increased volatility in the stock markets. The risk-off on Friday were fueled by an apparent liquidity shortage in China money markets, where the overnight repo rate rose to a 5-year high, presumably also signaling increased credit risk.

The halt of trading in shares that were rampantly bought up by retail investors in recent days calmed markets on Thursday, but today it became known that brokers resumed access to buying, so the hot theme of market cornering and short squeeze of hedge funds has every chance of jolting stock markets again. To justify this, take a look at the following chart:





It shows the value of two portfolios - stocks which have the highest number of short interest (aka “most shorted stocks”) and stocks - favorites of hedge funds. The indices are completely different in terms of composition of portfolios - the first consists of “losers” according to some market consensus (since they were heavily shorted), while the second – good firms with strong potential. It can be seen that in the last few days, especially on January 26-28, the indices mirror each other - when the value of “most shorted” index rises, the VIP index falls. That is, when retail investors rushed to buy shares of hopeless firms, for some reason market favorites fell. How can it be possible? One of the most logical explanations is that hedge funds were forced to sell their favorites from the index below in order to cover their short positions in stocks from the index above.

From the reasoning above, it follows that if hedge funds failed to reposition and close shorts yesterday when trading were halted, resumption of the opportunity to buy losers could allow the army of retail investors to again push the pros to the wall and this could lead to deeper fall in ‘favorite’ stocks, which, as we have already seen, easily feeds into the broader market, which is quite fragile due to weak news background and proximity to historical highs.

However, it is worth remembering that the macro picture has not changed much. Investors continue expect economic rebound in the first half of 2021. The risk described in the article is unique, so long-term correction, in my opinion, can be safely ruled-out. I consider the 3650 level in the S&P 500 (Christmas lows) as a potential entry point upwards. Unless, of course, the market turns around earlier.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
#23
Market short-squeeze is likely to continue keeping broad market under pressure


Asian and European stock indices rose on Monday, while silver surged nearly 10% (5-month high) as investors on social media and chatrooms have apparently set their choice on the precious metal for another pump. The rest of the precious metals complex posted much more modest gains.

The global stock index MSCI All-Country World lost 3.6% last week, but recovered 0.5% on Monday. However, it is still too early to take the rebound as a signal of reversal: inspired by recent success in GME and AMC, retail investors will likely continue raids on outsider shares, devastating short sellers. Goldman Sachs said that ongoing short squeeze was the biggest in 25 years with most shorted stocks almost doubled in just 3 months. Top-50 stocks in Russel 2000 (index small-cap firms) by volume of short positions in open interest rose by almost 60%:



These market trends suggest that the companies combing high volume of short positions in open interest with small market cap, increasingly become the targets for a pump driven by amateur investors, forcing market participants which weren’t lucky enough to be on the short side to seriously worry. According to the latest data, hedge fund Melvin Capital, the most famous victim of recent short squeeze, lost about $ 7 billion last week. In January, the fund's assets fell by more than half. Another financial institution, Maplelane Capital, was reported by the WSJ to suffer a 45% loss in January (it managed $ 3.5 billion).

According to GS, attacks on the short sellers prompted hedge funds to carry out massive deleveraging last week, pushing equities lower across the globe. However, given that the short-squeeze strategy hasn’t experienced massive failure so far, it’s likely to continue maintain the risk of further downside in the markets.

It should be well understood that the losses of hedge funds and associated liquidation of positions in stocks market favorites (which pulls broad indices down), is only one mechanism of development of correction. The second channel of impact is the wave of withdrawal of shabby deposits from funds, which is apparently gaining momentum. To meet withdrawal requests, hedge funds will be forced to sell assets increasing pressure on the broad market.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
#24
S&P 500 poised to break 3900 on NFP release as the US recovery gains steam

The December Non-Farm Payrolls report made investors seriously worried about impact of the coronavirus restrictions imposed in the winter on the US economy. Then the number of jobs in the economy shrank by 140 thousand, in particular due to the fact that 372 thousand restaurant workers lost their jobs. That quickly changed, though, with economic data for January pointing to expansion on all fronts. What kind of data made it possible to revise so quickly the outlook for the US economy in the first quarter and what impact on stocks we should expect?

First, these are indicators of activity and employment in the services sector, which accounts for about 70% of US GDP. The sector was hit hard in November and December due to tightening of social distancing measures and forced business closures. This week, the data such as the ISM Service Sector Activity Index, ADP January report, came out well above expectations. In particular, the ISM employment sub-index rose from a depressed 48.7 points to 55.2 points, indicating quite fast recovery in the pace of hiring. The ISM report on manufacturing sector released earlier this week also pointed to rebound in labor demand - the corresponding sub-index ticked higher, from 51.7 to 52.6 points. The 50-point mark in PMI indices separates zones of depression and recovery.

The ADP estimate of job growth nearly tripled expectations of 174,000 versus 49,000 forecast, although investors expected a rather downside surprise.

The latest readings in unemployment claims data, which experienced a brief surge in December, indicated that situation stabilizes with layoffs slowing quickly:



The growth of initial unemployment claims has been slowing for three weeks in a row while continuing claims also consistently beat expectations, dropping below 5 mn.

Following the data updates, Goldman updated its forecast for NFP jobs count, increasing its estimate from 125 to 200 thousand, which is higher than market consensus (50 thousand).

Second, in early January, stimulus checks from the government, which Congress approved in December, started to prop-up consumption. This led to high-frequency US consumption data indicating a spike in consumer spending in January:


High-frequency indicators indicate that in January, US consumption not only recovered, but could exceed pre-crisis levels by 4.1%. It’s extremely welcomed data as rising spending translates into rising firm revenues and consequent higher demand for labor.

The US dollar tends to appreciate either during downturns which are accompanied by tightening financial conditions => lack of liquidity (which drives demand for financing currencies, i.e. USD), or when there are expectations that US economy will outperform the Old World like EU or UK. The latest data on the US economy speaks in favor of the second scenario.

As we discussed in the article about possible new all-time highs in SPX, rapidly improving outlook for the US economy is accompanied by capital inflows in risk assets nominated in the US Dollar, and emerging economies, primarily in stock markets. The SPX hit its all-time high yesterday closing at 3875 points. In my opinion, a positive deviation in today's NFP report will be a catalyst for SPX breakout of 3900 mark. Preliminary data allow us to count on this outcome in the data.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
#25
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#26
Democrats inch closer to the huge stimulus bill. Should we expect inflation shock?

Both houses of the US Congress approved on Friday a budget plan that effectively deprived Republicans of any possibility of obstructing a new coronavirus relief package. Now, to approve the $1.9 trillion aid, a simple majority (51 votes), instead of the usual 60, will be enough for the Democrats.

Democrats and Republicans shared equally seats in the Senate, but Vice President Kamala Harris has the tie-breaking vote. As a representative of the Democratic Party, she will likely tip the scales in favor of Democrats in the voting on any tough Senate motion.

The news sparked a violent reaction in the markets fueling the rally towards new all-time highs. In line with the ideas we discussed last week, the S&P 500 is preparing to occupy a foothold at 3900.

As the markets celebrate another victory, various economists, even determined Keynesians, are sounding the alarm. The biggest risk is that another boom in government spending could push economy into overdrive, which, on the contrary, will be harmful, primarily by causing a jump in inflation. Already, the commodity price index, closely followed by the US consumer inflation, has jumped 25% over the year, which, given the correlation in historical data, corresponds to consumer inflation of about 4% in the United States:





Of course, in the immediate aftermath of the past recessions, consumer inflation has not kept pace with commodity prices, but the post-2020 recovery has been much faster than in past crises, and the US government intends to directly stimulate consumer spending, which will remove the main barrier to cost-push inflation.

Nevertheless, the head of the Treasury Janet Yellen made it clear that she sees more pain for the economy due to delay and less than necessary stimulus. In an interview over the weekend, she said the central bank has all the tools it needs to keep inflation under control. In her opinion, if the government approves the announced stimulus, the economy will recoup lost jobs by the end of 2022.

Expectations of stimulus measures fuel risk appetite in the markets. As the past stimulus rounds have shown, the consumer in the United States did not have time to worry and turn on austerity mode – government money transfers (“stimmy checks”) was followed by surges in consumer spending, which, as a result, led to an increase in companies' revenues. Consider the 44% growth in Amazon sales in 2020, despite the consensus that pandemic caused the worst shock in consumption since the Great Depression in the US. Tax risks have not materialized, as the hawkish Democrats have made it clear that they will return to this issue when the economy is on its feet.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
#27
World equities at fresh all-time highs


US equities sustained elevated mood on Tuesday closing near their all-time highs, passing the baton to Wednesday trading. SPX futures tested new all-time high at 3925 today, but trended lower later during London hours. European indices inched higher as well, but with less confidence, as news on lockdowns in the EU hinders "spreading wings", with no easing of restrictions in sight.

The rally is propelled largely by two growth catalysts – developments on the story with US extra government spending ($1.9 tn. stimulus bill) and quickening vaccinations in the United States.

The MSCI Global Equity Index, which tracks stocks in 49 countries, rose 0.27% renewing all-time record. Investors are not afraid of a potential tipping point, ignoring pronounced risk of overbought, judging by extreme RSI deviation:





After the leg of rapid rally since the start of the February, it would be great to see some intermittent “reset” in the of form of bearish retracement, however, as I wrote earlier, if there is a correction, it should be a quick, short-term, transient shock - it does not seem that the rally since the beginning of February were based on some indecision, on the contrary, it really looks like a new episode of the bull market thanks to the upcoming US stimulus. In addition, the search for yield (growing overweight to risk assets in portfolios) appears to be strengthening consensus in the markets (due to extremely low interest rates), and deviating from this consensus means losing a profit opportunity. Basically, there is nowhere to escape from the market (better place to store wealth) currently.

Among the short-term catalysts for the growth of risk assets, we can note the expectations of favorable hints from the head of the Federal Reserve System Powell, who will speak late tonight. Since the situation with the stimulus package of $1.9 trillion is gradually becoming clearer, signals about participation are expected from the Fed. The US government’s plans for huge new borrowings in the debt market (in order to finance stimulus) are unlikely to please the current holders of government bonds.

The market will wait for signals that the Central Bank will help the government to safely borrow funds on the debt market and avoid unwarranted move in yields. To do this, it will be necessary to "help" investors to absorb government bonds from the Treasury market, which may ultimately lead to an additional increase in money supply and a weaker dollar. Another view on rising money stock in the US is reserves (a form of money) of the US depository institutions with the Fed which continue to rise despite no aggressive QE from the Central Bank:




Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
#29
Stimulus expectations, jump in US economic momentum put USD under pressure


A key theme of trading on Monday has been renewed rise in market risk-free interest rates in the US. The yield on 10-year Treasury bond after short consolidation near 1.30% mark last week has updated its local high Monday, rising to 1.38%. This led to increased anxiety in equities: US stock index futures tumbled, SPX by about half a percent, Nasdaq by more than 1%.

There are two key channels through which an excessive rally of Treasury yields exerts pressure on equity markets:

- Bonds vs. stocks choice. Some investors start to rebalance their portfolios, dumping stocks and buying bonds as they became cheaper and start to offer meaningful returns. Stocks which have high duration (like growth stocks) are good candidates for replacement by bonds and tend now to sustain more losses;

- Borrowing costs channel. The effect of the rise in risk-free rates feeds into other credit market rates, so it’s reasonable to expect that long-term borrowing costs for firms will rise as well. This has negative effect on shares value as rising interest rates reduce firms’ access to cheap financing.

Nominal interest rates in the US are rising due to expectations of new fiscal stimulus, which in turn will lead to an increase in the supply of Treasuries in the market. Spurred by government spending economic growth should lead to higher inflation, so investors are now also demanding higher compensation for this risk. Comparing yields on 10Yr Treasury Note and bonds with same maturity but protected from inflation (TIPS) we can clearly see the steep rise in inflation premia:






This week, attention will be focused on Powell testimonial in the US Congress. Also, the Fed will release a semi-annual report on monetary policy. Investors will examine the report for clues on the essence of the Fed’s new concept of inflation targeting. It’s still not clear from the Fed communication what should be trajectory or rate of growth of inflation which can enable the Fed to lift interest rates. We are talking about a change in rates on a more distant horizon, but long-term investment assets should be sensitive to the new information, which will constitute a market reaction.

US dollar is expected to continue to drift lower thanks to benign environment for risk-on trading supported by strong US economic data. We saw huge jump in US retail sales in January but still White House administration determined to push new 1.9 tn. stimulus to the Congress. Rising self-sustained economic momentum supported by massive government spending spree in the US should trigger stronger hunt for the yield and inflation fears which is generally negative for US currency.

The technical picture also favors USD slide as we get closer to March:




Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
#30
Where oil could move ahead of the OPEC+ meeting in March?



Oil prices continued to rise on Thursday with Brent breaking $67/bbl, returning to the level where it traded in January 2020. Powell's speech this week, in which he said about the need to maintain significant monetary easing, helped oil rally. Additional reports from the US indicated that oil market tightening gathers pace. As it often happened before, traders could easily miss the moment where the market will already start to suffer from undersupply. That is why oil prices are rising in unabated fashion.

The US EIA released its weekly oil inventories report yesterday. One of the key indicators, commercial crude oil reserves, showed an increase of 1.29 million barrels. The rise in inventories is usually associated with a bearish price response. However, the market discounted the reading despite expecting a 5.19 million barrels decline. Why? It may seem that US oil producers quickly restored output, which led to an increase in stockpiles, but this is not the case: in fact, the level of refinery capacity utilization decreased over the week by 14.5% to 68.6%, complicating the clearance of inventories:




This utilization rate is the lowest level since May 2020. Therefore, even a moderate recovery in production could have such an effect on inventories. That is why the release of the data could have a positive effect on the market despite the negative change in headline reading.

Gasoline reserves rose indicating that petroleum demand continues to suffer as cold weather obviously hampers mobility. It’s also a moderately bullish development for WTI prices.

Speaking about the upcoming releases of EIA reports, we can expect that the upward trend in inventories will persist for some time, as production has shown that it can quickly recover, but the refinery's refining capacity is not. The growth of stockpiles is likely to have minimal impact on the market.

More important for the oil market is the upcoming meeting between OPEC and Russia to discuss the current deal on output curbs. Oil demand is recovering, but the OPEC + deal limits ability of producers to ramp up output, what results in confident growth of prices. Producers, especially the Russian Federation, have a great incentive to gradually lift curbs. Such expectations could drive pullback in prices ahead of the March 4th meeting and there is a risk for some meaningful correction in the market. The situation contributes precisely to sell on rumors (rather than buy), as the risks are clearly skewed in favor of increasing production in response to strengthening demand which should have negative impact on prices or at least make the rally less pronounced.

Technical setup also favors meaningful bearish oil pullback ahead of the meeting:





Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.