May 15, 2020

Special Report: Have Investors Missed The Stock Rally?

Special Report: Have Investors Missed The Stock Rally?

US futures are trading higher on the final trading day of the week after a volatile session. The Dow Jones dropped over 450 points during early hours of trading yesterday but finished the day with a gain of over 377 points. The question for traders is whether yesterday’s sell-off was an opportunity to buy stocks?

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Technical Perspective

From a technical perspective, the Dow Jones is in a battle with its 200-week smooth moving average on the weekly chart. If the index can close the week above this moving average, it will be the second consecutive week for the Dow to close above this average. This will send a bullish signal; when the price crosses above the 200-week SMA, traders trading on technical analysis consider this to be a bullish sign.

Overall, this presents a bullish outlook for the index but only if the Dow Jones industrial index stays above this moving average. One may ask why I am only looking at the Dow Jones index and not at other indices?

Remember, it is the Dow Jones index that is the weakest among the other indices: the S&P500 index and the Nasdaq index, which is the strongest of all three indices. Thus, it is this lagging index that needs to demonstrate similar strength like other indices that are already above the 200-day SMA.

Fundamental Perspective

From a fundamental perspective, things are not looking too rosy. Yes, one needs to acknowledge that yesterday’s US jobless claims were better than last week, which may be an early indication that a bottom may be in place for the US job market. However, the continuous claim element of the job market is astonishingly high, and it will take a long time for Americans to recover.

The current social distancing measures will adversely influence business activity for a long time. Businesses already know that demand is likely to remain low for an extended period, and it will be a while before corporates begin hiring employees again. Moreover, in the coming weeks and months, more businesses will likely declare bankruptcy due to feeble demand.

When we look at things from a geopolitical perspective, that is when the growth picture starts to look ugly. Donald Trump could not have picked the worst time to ramp up tensions with China. He blamed China for not collaborating on Coronavirus. There are some reports that the Chinese are trying to steal the Coronavirus vaccine technology. Trump calls President Xi Jinping his close friend, but he has threatened China with new tariffs because of Coronavirus. The previous tariff issue that resulted in a trade war between the two countries still presents a massive headache for US growth. Therefore, speaking from a geopolitical angle, matters have worsened.

In addition, the current earnings season stipulates one story: things are going to get worse for corporates. Their net revenues will presumably continue to fall, which will likely result in a further reduction in dividends.

However, one positive change expected in the coming quarter is that corporates will get a better idea concerning their future forecast, which may help them to gauge when the situation is expected to improve.

What About Hedging Bets?

Volatility is an important measure to gauge market optimism. But, sadly for the bulls, the index is still holding on to some substantial gains, and it is up over 136% year-to-date (YTD). The recent data for the VIX ETF shows that investors have started to pour in more money. The index experienced an inflow of $151.7 million, which resulted in the largest daily increase since March 19th. Investors have been adding to this fund for the past three days, and fund assets have increased by 21%. Usually, investors pour money in VIX ETF when they do not believe in the current rally, and as a result, they want to hedge their risk by buying VIX.  

The ultimate safe-haven asset, gold, is also up 14% year-to-date. It is on track to record two straight weeks of gain. Hedging is also taking place here. The price of $1,700 remains a vital level because if the price stays above this mark, the bulls can hope for the price to reach $2,000.

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