Market calms down
Today, the cyclical-upswing/reflation themes are back in play, which means that recent laggards are now driving the indexes. Banks, transportation, and energy – all of which have been shaky since May/June – are outperforming today, but each is still 10% off its 2021 high.
As can be seen, the S&P 500′s advance has slowed since May, but has remained broadly upward since around Election Day.
It’s been more of a slog than a sprint lately, with lots of broken strides and rough patches. However, this means that the market has been put to the test along the way. For the time being, it has addressed some of the major criticisms leveled at the market’s performance. “Participation has been lacking, with only a minority of stocks rising to confirm the rally,” for example. True, and not to be overlooked, but this can be repaired and can continue for months before catching up to the broad indexes. And, after months of sideways movement, the equal-weight S&P is now closing in on a new high, keeping it well ahead of the main mega-cap-driven S&P over the past year.
“The market is overly reliant on the Big Five Nasdaq titans.” Mathematically, this is more or less correct. Despite this, Apple and Facebook both sold off this week after reporting strong earnings. Microsoft slid. And the S&P 500 has regrouped and is currently plodding higher.
“Investors are overconfident, and the market is fueled by speculative flows.” Even if it was true in the first quarter, this is no longer the case. We’re looking at an indictment of a prominent SPAC/EV founder, the ultimate retail speculative play. Robinhood has had a snoozing reaction to its IPO, crypto is down 30% from its highs, and retail investor bullishness has waned in surveys.
None of this means that the market is out of the woods. Stocks are about to enter a seasonal slump. The weeks following the 2021 Fed meetings have been turbulent. Market breadth is lagging, which can lead to instability, and financial conditions are not loosening. However, the latest phase of this bull market has a level of sobriety and resilience that should protect against severe and long-term downturns.
The story of RobinHood is a bit of a Rorschach test. Limp demand in comparison to expectations, more of a liquidity/cash-out event than a source of growth capital. Excellent bet on newcomer active traders, but activity has dwindled. Even if it is primarily a brokerage firm, it is still vastly overvalued. Defensible in terms of fintech/consumer apps. All else being equal, the fact that this does not appear to be a headlong frenzy of speculative FOMO is probably a net positive for the market. Given the regulatory haze and dented brand, one could argue that skepticism is the dominant attitude.
For the time being, market breadth is fairly good, with advancers outnumbering decliners by a factor of three.
VIX is slowly declining, currently in the mid-17s. Given the seasonal overhang, etc., there is still some hedging bid. The slope of the VIX futures array, on the other hand, is favorable for bulls – it tilts higher with each successive month, which is the more normal/stable setup. It’s possible that things will change quickly, but it’s not on my list of concerns right now.
Bitcoin on the raise again
According to Michael Rinko, an analyst at global macro hedge fund Pervalle Global, the Bitcoin balance on exchanges is an important metric to monitor because it is a proxy for confidence.
“Today is the first indication we’ve seen that big institutional money is returning,” he said. “Since the May crash, small ‘hodlers’… have accumulated at the expense of whales in the bitcoin market. Meanwhile, institutional inflows were muted during this time period as investors remained wary following the more than 50% sell-off.”
The term “hodlers” refers to long-term cryptocurrency holders.
Balance on exchanges fell during the bull run in late 2020 and early 2021, then rose during the price correction. It has remained flat since, indicating that large institutions have stopped buying bitcoin in bulk and moving it off exchanges, according to Rinko.
“If investors are confident,” he says, “they are generally more willing to pull coins off exchanges into cold storage,” which means they keep them offline, “effectively adding a layer of friction to the selling process.” “Institutions, in particular, almost always keep their bitcoin in cold storage and away from exchanges because cold storage provides stronger security measures.”
Bitcoin has struggled to reclaim its record high above $60,000 from May, and traders have been keeping a close eye on it wither around $30,000 for over two months. Many analysts regard the latter as a critical level of support for the digital asset.
The largest cryptocurrency by market capitalization is currently trading around $40,000, up 26.2 percent for the week. Bitcoin is also on track for its best week since January 8, when it gained 34.73 percent.
The price increased on Sunday night due to a rumor that Amazon may allow customers to pay for orders with cryptocurrency. The e-commerce behemoth has since denied the story, sending the price back down, but other bullish signals in the industry have kept institutional investors interested. This week alone, more than ten cryptocurrency companies raised hundreds of millions of dollars in venture capital. FTX Trading, a cryptocurrency exchange, raised $900 million last week at a valuation of $18 billion.
“Watching the price jump 35 percent in a week is gut-wrenching and anxiety-inducing if you’re an institution that’s put resources into looking at bitcoin and finally received internal approval to allocate after years of research,” Rinko said. “Some of the trading right now is definitely driven by the psychology of missing the dip.”
Chinese stocks are trading at a discount
“From a tactical standpoint, we believe that holding Chinese quality names is quite appealing — higher quality names are trading at a historical discount to lower quality stocks while providing a very high-quality differential. “Upward earnings revisions provide additional support as momentum in these names continues to pick up,” Bernstein analysts wrote in a July 21 research note.
Tencent is one of Bernstein’s “top long-term picks in the China Internet sector,” with analysts praising its short-message app WeChat for its ability to acquire new customers at a “fraction” of the cost of its competitors, as well as its e-commerce system, which they say provides new commercial opportunities. Tencent was fined and ordered to give up exclusive music rights by China’s State Administration for Market Regulation on Saturday for anti-competitive behavior, and the company responded by saying it will “comply with all regulatory requirements.”
In an email on Monday, Bernstein’s Rupal described Tencent as a “high growth stock.” “The regulatory overhang may persist in the short term, but for long-term investors, structural growth stocks in China have delivered very strong returns over the last 5-10 years, and current valuations for a market leader like Tencent look compelling,” he added.
Bernstein rates the stock as outperform. “We have positive long-term outlooks on the company’s gaming and advertising businesses and expect both to compound over time,” said the analysts.
Platform for online sales JD.com is also a Bernstein pick due to its management’s optimism about earnings in the second half of the year. “JD also appears relatively well positioned from a regulatory standpoint, and may benefit as brands and merchants look beyond Alibaba’s marketplaces,” the analysts wrote. They expect “solid” earnings growth in the coming years and have assigned the stock an outperform rating.
Longi Green Energy, a solar power company that Bernstein classifies as a tech stock, is a pick for demand generated by China’s decarbonization targets — the country aims to be net zero by 2060. It also likes Daqo New Energy, which manufactures polysilicon used in solar panels and is covered by Bernstein’s technology coverage. “Due to its low cost, high quality, and strong capital allocation ability, Daqo will benefit the most from the increasing demand for high-purity polysilicon,” the analysts wrote.
Bernstein rates Midea, an electrical appliance company, as outperform and a “solid buy.” Analysts predict that the company’s revenue will grow at a compound annual growth rate (CAGR) of 10% through 2025. “Midea is a good company with [a] balanced product mix, [a] leading position in the appliance sector, and great execution ability,” wrote the analysts.
Analysts also rated smart home company Haier as outperform, praising its premium sales growth in its home market and overseas revenue growth (particularly in the United States) from 49 percent in 2020 to a forecast 54 percent in 2025.
According to Bernstein, China Tourism Group is a candidate for its duty-free company CDF, which has an 85 percent to 90 percent market share in the country. “Growing leisure travels, increased proclivity to brands and luxury goods, and low penetration of China’s DF [duty free] shops to Chinese consumers’ travel spending are driving long-term growth in China duty-free sales,” the analysts wrote. While a Covid-19 outbreak in June reduced revenue in the company’s outlets on the popular vacation island of Hainan, analysts expect sales to resume during the summer season.