Market Analysis and Opportunities: Tuesday, August 25th, 2020
OIL
An interesting opportunity seems to be developing in oil. Taking a look at the current oil contract it’s trading at 43.41$. A possible change of character might be brewing with the commodity trading above its 200 day moving average for the first time since January 21st, 2020 where it closed at 58.58$. A medium-term target to 50.56$ (the prior February 2019 to January 2020 support level now acting as resistance) seems possible, representing a 16.47% advance. A break below all the moving averages, and below the key July 30th hammer low of 38.72$ would invalidate the trade idea.
From a fundamental perspective, Hurricane Laura may disrupt oil production as it is expected to hit the US Gulf Coast refiners on Thursday. It is reported that 80% of oil output in the Gulf of Mexico is being shut down. With Goldman Sach’s estimating a 4 to 5 million of refining capacity in the storm’s path. This possible supply disruption may fuel the advance of oil.
ROTATION FROM INVESTMENT GRADE TO JUNK
An interesting development is taking place in the fixed income space. As we’ve seen some outflows out of long term treasuries (TLT), risk-off investment, into risk-on with constructive price action on JNK. A possible fundamental driver is the excess liquidity in the financial system due to a very dovish stance from the FED with its strong QE (quantitative easing) program, as well as the fiscal stimulus from the Trump Administration. Low rates create an ideal environment for issuers to roll over their debt at more competitive interest rates.
Looking at the long term treasuries price action (TLT), currently trading below the 20 and 50 day moving average (MA). The August 11th gap down broke the 20 MA decisively, and the August 13th candle closing below the 50 MA creates a change of character from bullish to bearish. A retest around the June 5th lows of 153.16 is very possible, representing around a 5.5% decline to the rising 200 day moving average currently trading at 155.51. A long position may be initiated if this support level is respected, with a strong bounce off it.
EQUITIES
It seems like a frothy market environment, where equities are diverging from what many consider their intrinsic valuations. Nonetheless, the market is still suggesting we remain exposed to the long side, as price action has sustained a steady rally above the key moving averages. Gauging market behavior using the 20, 50, and 200-day moving averages. We’ve climbed a proverbial wall of worry with many investors waiting for pullbacks that never came, bear investors waiting for another leg lower, and possibly some PMs (portfolio managers) reducing equity exposure as the SPX is trading near COVID-19 sell-off start levels (psychological relief level as many money managers are at breakeven or near flat). This may create sidelined money, and if the market edges slowly higher; creating a possible FOMO (fear of missing out) effect where idle cash may want to participate and keep fueling the advance.
The key as always is to interpret what price is telling us, and not our opinions. We are here to make money, not to see our opinions be proven right; flexibility and adaptability will continue being paramount in search of alpha. That being said, strict risk management has to be exercised through proper position sizing, and stop management. Risk management is the name of the game folks.
As of this writing, August 25th, 2020, the Nasdaq closed around the 11715 level near the upper channel resistance (connecting June 10th 10155 high, around the July 13th 11058 high, and July 21st 11058 high). This technical level has usually led to a moderate pullback. A 4–5% pullback would be healthy around the 20 moving average: the 11188 level and the channel support. With the line in the sand being the July 24th hammer low of 10301, below the 50 day moving average. This may warrant defensive action, and a move to cash to preserve equity until the market environment shows more constructive price action.
Watchlist if we see ideal risk/reward entries preferably strong bounces of the 200-day moving average with expanding volume suggesting institutional accumulation. On the fundamental side, preferably names with expanding sales, EPS (earnings per share), healthy ROE and debt, high management ownership, and low float (shares outstanding). Interesting trades are also observed in market themes (WORK, SPCE, CODX), as an example, we have FSLY. It is a market leader in this advance with no earnings. Mentioned in no particular order.
SPCE, LUV, FIVE, LNG, KREF, OSPN, DBX, PW, ROKU, BYND, RP, DIOD, RVLV, PETS, RYAAY, SAFE, SHEN, SMCI, SUPN, UI, VIAC, VIPS, VRSN, WORK, ZYXI, CODX
Remember, THIS IS NOT FINANCIAL ADVICE. The material in this article is for informative, and educational purposes only. Always consult with your financial advisor before investing.