Carlsquare weekly market letter: China took the lead – what’s next?

• Last week we favoured the Chinese equity market on the back of the policy shift in China, and this has certainly been the case.
• Iran’s missile attack on Israel and the expected Israeli retaliation is a good excuse for the market to take a break. From a technical perspective, this would be good as it would give way to the traditional Santa Claus rally.
• USD may have reversed, threatening the bull market, so keep an eye on it

Nothing is better for the market than some fresh liquidity.

Yesterday alone Shanghai gained 8 percent.

Despite the massive gain, there is still room to the upside on the weekly chart. It will be very interesting to see how the funds behave here. There is an active movement in the US for funds to sell Chinese assets, but with these potential gains, some funds will surely think twice.

As in 2008, China was the first country to launch a package, which we wrote about in the last weekly report. Since then, the Shanghai stock market has rallied every day. Yesterday China also relaxed the rules for home buyers. There is no limit on the number of homes you can buy and the down payment requirements for homeowners have also been eased. This is an important step as housing speculation has been one of the main drivers in China in the past. Today, the market is almost dead and, in a wait, -and-see mode. But with renewed interest in buying homes, this will release liquidity and support the property sector. Property stocks rallied +10% on the news.

Many stocks look overbought in the short term, such as Alibaba above. But this is a real smorgasbord for traders! Overbought is not in itself a sell signal.

If the positive trend in China continues, we would expect to see a break-up of bitcoin. Bitcoin is one of the few ways that Chinese people can move money out of the country. Let’s keep an eye on the chart above.

Turning to the US, the Fed could be the next central bank to follow suit. As the US deficit grows, someone has to foot the bill. Historically, China and Japan have been willing buyers, but those days are over. We think the Fed will step in at some point. But we are not there yet. All it has to do is keep cutting rates.

It is interesting to see how the US large caps are trading like a train, nicely between the trend lines. One thing that has caught our eye is the negative trend in volume (=liquidity), which has been trending down since 2020, even as the market has been trending up. This is a negative divergence that needs to be resolved. Either with higher volumes or lower market prices. Is this a break in the negative trend that we have seen over the last two months? That would be very good news for the equity market. Higher volumes will be a vitamin pill for small caps and IPOs.

The USD has been in a downward trend but broke up yesterday. A falling USD is a sign that capital is coming into the US. When the USD rises, it means that money is leaving the country, which puts pressure on the capital markets. So please pay close attention to this as it can cause a setback in the entire market.

Even if we are not so worried about the general negative themes in the market now: people have plenty of reasons to sell stocks: conflict in the Middle East, the US presidential elections, US employment figures on Friday, will inflation return, etc. The talking heads are doing their rounds…

One strategy to manage the risk is to sell less liquid assets and buy protection via the VIX. We may have been a little bit off with the timing as the VIX rose by 15 percent yesterday. But the VIX, which is the market’s price for expected volatility over the next 30 days, is still close to neutral relative to its historical levels.

The VVIX, which measures the expected volatility for the VIX (yes, that’s right, the expected volatility for the coming volatility), has broken down, which is a sign that people in the market are getting more nervous. Happy trading!

Analysts lower their earnings forecasts ahead of results

Wall Street analysts have lowered their earnings growth forecasts for S&P500 companies from 7.8% on 30 June 2024 to 4.6% on 20 September 2024.  The S&P500 Q3 2024 interim reports will start from around 15 October.

On Tuesday 15th October, Bank of America, Johnson & Johnson and United Health Group are some of the major US companies to release their Q3 figures. This will be followed by interim results from Tesla, Abbott Laboratories and ASML Holding on Wednesday 16 October. On Thursday 17 October, Netflix, Morgan Stanley, Blackstone Group and Intuitive Surgical are scheduled to release their reports. The week ends on Friday 18 October with reports from Procter & Gamble and American Express.

The three S&P500 sectors expected to post the highest earnings growth in the third quarter of 2024 are Information Technology at 15.3% (15.0% on 30 June), Health Care at 11.2% (16.9%) and Communication Services at 10.5% (10.0%). Consumer Discretionary, Materials and Energy are expected to be the worst performers with earnings growth of -0.1%, -1.6% and -17.6% respectively.

For Q3 2024, 60 S&P500 companies have issued negative earnings estimates, while 50 S&P500 companies have issued positive earnings estimates.

Number of negative and positive Q3 2024 earnings guidance by S&P500 sector

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