Carlsquare weekly market letter: Is a change of the wind in the making?

• We have had an exceptionally strong market since the bottom in October 2023. The recovery is still concentrated among a small number of companies in the US equity market. We are probably close to an inflection point. There are a lot of parameters to look at. But when you have a strong wind in your sails, sometimes you just need to look at one instrument to find the perfect trigger. So this time we focus on a single stock, because it seems that its forthcoming performance will tell the story for the whole market…

Since the energy crisis of 2022, oil prices have caused inflation and spooked the bond market, leading to a sharp rise in interest rates.

INTEREST RATES FOLLOW THE OIL PRICE

As the oil price has fallen, inflation has followed.

OIL PRICE IS STILL LOW, BUT KEEP AN EYE ON IT

The current focus on inflation seems overdone given the oil price performance. Oil is now attempting to trade higher, so please add it to your watch list.

NATGAS TRADING AT ANNUAL LOWS

Indeed, US natural gas is trading at multi-year lows. Perhaps this is even a buying opportunity. But be careful. Natural gas is very hard to trade. It is said that trading natural gas is a common cause of divorce.

S&P 500 TRADING AT RESISTANCE

Falling interest rates have boosted equity markets. Now, after more than three months of rallying, it would be natural to see some consolidation. The S&P 500 is trading at resistance levels. As we have said in recent weeks, there are still no sell signals in the market and as long as the trend is positive, let the trend be your friend.

S&P 500 TRADING AT RESISTANCE

From a technical point of view, the S&P 500 is trading in a rising wedge. It will be difficult for the bulls to rescue this situation.

The best way to find a trigger is to look at the leading stocks. We are still more focused on the big seven than the broader S&P 500 index. Tesla is doing badly and both Microsoft and Apple are weaker than you might expect.

The best performer at the moment is actually Nvida. The company is a leading maker of graphics processing units and chips, and a leader in the AI race.

NVIDA IS TRADING IN A PARABOLIC MOVE

As you can see from the chart below, Nvidia has performed strongly and is up an impressive 45% year to date, but the immediate problem is that it is trading exponentially. We have seen this type of trading before:

TESLA DID THE SAME IN 2021 – IT DIDN’T END WELL

Tesla went parabolic twice in 2021 when it was the market leader. Both times it ended with a huge setback. Note that the MA200 helped both times.

LIKE APPLE 2021

Apple has also seen the same thing several times. Note that this parabolic move did not end in a crash, but rather in a period of consolidation.

Looking at the options market can give you an indication of what the market expects to happen in the future. A call option gives the owner the right to buy the underlying share at a predetermined price on a specified date in the future. The opposite, a put option, gives the owner the right to sell the underlying share at a predetermined price on a specified date in the future. Puts are therefore used to speculate on future price falls or to protect against future price falls (assuming a long position in the underlying stock) and vice versa.

Skew is also used to measure the difference in price (in terms of implied volatility) between buying a downside put option and buying an upside call option. A high skew implies that option traders are willing to pay “extra” for downside protection, while a low skew implies that option traders see little downside risk and are willing to pay “extra” for upside potential.

Currently, the skew is low for most companies in the S&P 500 with more than 500,000 contracts outstanding. This suggests that option traders see limited downside risk for the typical S&P 500 company.

Nvidia is no exception, with an extremely low skew ahead of the report on 21 February. This suggests that the market has high expectations for the report and therefore a positive move in the stock.

However, again from an options market perspective, the outlook for Nvidia is a little different when looking a little further out. The put/call ratio looks at the number of puts outstanding in relation to the number of calls. A put/call ratio between or above 0.7-1.0 is considered bearish, while a put/call ratio below or below 0.5-0.7 is considered bullish.

The put/call ratio for Nvidia is 1.0 for options expiring in December 2024 and 1.4 for options expiring in January 2025. This suggests that options traders are positioning for a decline in Nvidia’s share price towards the end of 2024.

So put Nvidia at the top of your watch list for the coming days.

Happy trading!

Q4 2023 reporting season

S&P500 stocks in the US

As of Friday 9 February 2024, around 335 S&P500 companies have reported their fourth quarter results. 75% of S&P companies have reported a positive EPS surprise and 65% have reported a positive revenue surprise.

For the fourth quarter of 2023, earnings growth for S&P500 companies is currently at 2.9%, compared to 1.6% one week ago.

For Q1 2024, 52 S&P500 companies have issued negative EPS guidance  and 21 S&P500 companies have issued positive earnings guidance.

S&P500 SECTOR FORWARD 12-MONTH P/E RATIOS (FEB 8 VS 25_YEAR AVERAGE)

Source: Factset Earnings Insight 

The top three S&P500 sectors in terms of EPS versus estimates are Energy, Information Technology and Industrials with 91%, 85% and 84%, respectively, beating estimates. Materials, Financials and Real Estate were the worst performers, with only 63%, 59% and 53% of Q4 2023 results beating expectations.

The table below shows 13 major US companies that reported quarterly results for Q4 2023 last week, along with the actual and expected EPS, the percentage deviation and the post-announcement price movement. The average EPS surprise is 10.1% and the median is 4.8% for 87 reporting companies since 1 January 2024. The post-announcement price movement is minus 0.4% on average and minus 1.1% on median.

Below we have listed the market’s earnings per share expectations for each company and the date of each interim report for the coming week.

OMX stocks in Sweden

Carlsquare has compiled the results, revenues and order intake compared to expectations for 74 OMX companies that have submitted their Q4 2023 reports since 18 January 2024. As can be seen, 53% of Q4 results were better than expected, but only 46% of Q4 revenues were better than expected. Six out of twelve companies missed expectations for new orders.

Q4 2023 OUTCOME VERSUS EXPECTATIONS FOR OMX COMPANIES

The following table shows the deviation (in percent) of the earnings, sales and order intake results of the 26 OMX companies that have reported their Q4 2023 results since 7 February compared to the corresponding consensus estimates.

Sources: Avanza, Bloombergs, Carlsquare, Direkt och Infront.

Week Ahead

Reports on Wednesday, 14 February: Scandic Hotels, Castellum, Bioarctic, Avance Gas, Genmab, Mowi, Norsk Hydro, Terveystalo, Vaisala, Cisco, CME Group, Twilio and Sony.

First up is the UK CPI and PPI for January at 8.00 CET. Three hours later we get December industrial production and Q4 employment from the Eurozone. The US will contribute with the weekly oil inventories statistics (DOE).

Reports on Thursday, 15 February: Storskogen, Beijer Alma, Betsson, NCAB, Sinch, AQ Group, Tietoevry, Fortnox, Biotage, Bravida, Camurus, Embracer, Hufvudstaden, Instalco, Kojamo, Salmar, TGS, Tomra, Schneider Electric, Applied Materials, Deere, Ingersoll Rand and the Southern Company.

Japan starts with Q4 GDP and December industrial production at 0.50 and 5.30 CET. Statistics Sweden will publish the construction cost index for January at 8.00 CET. At the same time, the UK will release Q4 GDP and December industrial production. Spain’s CPI for January is due at 9.00 CET. One hour later, the IEA will release its monthly report on oil. The Eurozone will also contribute with its December trade balance. From the United States, we get January retail sales and import prices, the February Empire manufacturing index and the Philadelphia Fed index, initial jobless claims, December industrial production, February NAHB housing index and December inventories of unsold goods.

Reports on Friday, 16 February:  Diös, Fagerhult, Nibe, Norwegian, Metso, QT Group, Uponor, Allianz.

Statistics Sweden presents the unemployment rate for January at 8.00 CET. At the same time, we get retail sales from the UK and wholesale prices from Germany, both for January. 45 minutes later, France’s CPI for January is due. The United States brings us PPI and housing construction for January, as well as the Michigan index and the NAHB housing market index for February.

Reports on Monday, 19 February:  OEM Copart.

We get Japan’s Machinery Orders in December at 0.50 CET. Statistics Sweden presents the January CPI at 8.00 CET.

Reports on Tuesday, 20 February: Truecaller, Bakkafrost, Barclays, HSBC, Home Depot, Medtronic, Palo Alto Networks and Walmart.

Statistics Sweden publishes industrial inventories for Q4 at 8.00 CET.EMU’s current account balance and construction output for December are due at 10.00 and 11.00 CET. From Canada we get January CPI. The United States contributes Redbook retail sales, weekly data, leading indicators for January and oil inventories (API), weekly statistics.

Disclaimer:

The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.

The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be distributed to such persons. The analysis is not intended for natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.