In this week’s Alpha Over Beta Market Outlook:
The market is locked in search for directions fighting conflicting news, still we are slightly biased to the upside considering the US China upcoming deal and the Brexit deal hopefully approved on the UK Parliament.
Fundamentals
Let’s start with the market. The S&P 500 advanced about half a percent this week. This was the first week of earnings reports for the third quarter of 2019 and was generally viewed as a good one. It started with very low expectations regarding earnings but the company so far reporting was all right. It wasn’t great but it was as expected. So, the index was up about half a percent for the week and the NASDAQ was also about 0.4 and the Russell was about 1.5 percent up.
Let’s talk of the fundamentals. What are the fundamentals that are pushing the market ? First, the EU and the UK’s finally reported they have reached some kind of compromise that would allow for some kind of Brexit. The approval in the UK parliament is not there yet and there’s going to be hardship for the prime minister to push this deal but it looks like if he’s going to do that; that we’re finally going to have an orderly Brexit which is good for the UK economy and for the European economy and at the end of the day affects the US economy as well.
So, that’s one good piece of news that hopefully would materialize next week and we’ll see that the UK is pushing an orderly Brexit finally after so many years of talking about this. The earning season is up as we spoke before. The earnings are okay as expected and we’re going to see how that’s going to develop because the earning season is not over yet. We still have a lot of companies that are reporting earnings and that certainly is going to push the markets in one direction or the other.
Another fundamental force that is affecting the market is, of course, the US and China. We talked about it a lot in our previous podcasts and where they stand right now ; they’re still working on the text for what is called the phase one trade agreement. The first type of the trade agreement between the US and China is supposed to be closed in the upcoming days or weeks and that’s a good piece of news. President Donald Trump hopes to reach some kind of agreement and the Chinese are also cornered and their economy is shrinking and they have a motivation to end this as well.
So, everybody has some sort of motivation to move this agreement in the right direction and get it signed. At least the first step of it so we’re hoping for some good news on that front as well. Also, after many years of discussing this. One bad piece of news that we got from Germany. Germany got its 2020 growth forecast from about one and a half percent to one percent. That’s not good news. Germany is a driving force for the European economy and if they are not growing; there’s a problem there.
We talked about this in previous podcasts. They have quite a bit of a challenge with their economy and that’s not a good piece of news for the European economy which is not in the best of situations right now so Germany is in recession and is supposed to push the European economy forward but won’t be able to do that I’m afraid for the next quarter. And the Chinese posted their growth numbers Their growth numbers were the lowest in 27 years.
So, after all this skirmish with the US regarding the traders and the tariffs; the Chinese are in a position where they have reported growth.They are growing but they are growing not as fast as they did before and this is not good news for the Chinese economy and of course, this is a direct implication of the trade war with the US and so their economy is slowing down.
All in all, the US market is biased slightly to the bullish side. Optimistic future forecasts of the economy are pushing that.
I think the majority of the traders are expecting some piece of agreement to be signed with the Chinese which is going to be considered as a good first step so that is a good indicator for future optimism. That’s future optimism in the horizon but we have to say that after researching the markets for so long and looking at the current trend and the forces and the motivation behind it and earnings as they are reported in the earning reports of the companies, we have to say that most of the money that could have been made in the last bullish cycle was already made.
So, we’re not in the middle and certainly not in the beginning of a bullish cycle but we are somewhere in the last 25% of that. There’s going to be some hardship along the ways because we’re not in the middle of it and most of the wind behind this uptrend is mostly out. We are slightly bullish to the upside.
We want to see the market taking just a couple of points up and we don’t see it going down despite the news that we spoke about Germany and China.
We are seeing some optimism in the horizon regarding China. As we said, not the economy but the agreement with the US and earning reports are going to be all right and that’s always as expected going to push the market a little bit to the upside. What’s going to happen in the next upcoming weeks or months, that’s anybody’s guess but for now, what we see is that we are slightly bullish.
Technical aspect
Let’s talk about technicals, technicals are very interesting. For the short term, we see that the market is really directionless. The bottom is set at around 2850. for the S&P 500. The top is set at 3010, 3020. That’s the area where the all-time high is set so we don’t see a lot of direction in the short term for the market. That could last for another week or so but for the short term; we don’t see in the shorter term any direction in the market. The market right now is directionless moving up and down between the 2850 for support and 3020- 3040 as resistance.
Breaking that 3020 to the upside or breaking the 2850 to the downside is a trigger but between those areas, there isn’t a lot of direction. Now for the long term, the story is a bit more complicated. The market is building a long term ascending triangle. If we look at where it might explode; it might explode at the beginning of 2020 or the end of 2019. That’s about the area we think the market is going to have to make a decision regarding where it’s taking the index up or down.
If you want to see detailed analysis, technical analysis of the market, please shoot me an email. That’s alon@alphaoverbeta.net.
Also, you can take a look at a detailed technical analysis of the market and you can see the ascending triangle that we are building for the last three or four months.
Trading strategies
Regarding the trading strategies, most of the trading strategies remained in place this week since this week wasn’t a lot of action. Just to reiterate where we are standing right now, we have open positions in QQQ, on the gold, on VNQ and we’ve increased our assets in UST. So, basically one of our strategies that is called asset allocation. That strategy increased its allocation in UST. UST is the US government bonds ETF and the fact that it increased allocation in the government bonds means that all the fluctuations and the volatility in the market are just too high to make a decision.
And for now, the best thing to do is just park the money someplace. UST is a good place to park it and we make our decisions as we said towards the end of the year, maybe the beginning of 2020. Positions that we have opened. So, in the list of positions that we have opened this week, we have positions opened in Aflac Incorporated ticker symbol AFL.. Also, we have another position in Bank of America. BAC, as you can see if you can take a look at the chart , you can see that it’s fighting resistance over 30$-31$ and it’s going to break and if it breaks then it’s going to move to the upside. So, Bank of America is one of the positions that we have opened this week. And two energy companies that we opened this week are CMS Energy Corporation. That’s ticker symbol CMS. If you can check the charts, you can see that they started movement at around the beginning of 2019. Started an up move and again there was a correction and we think the correction is over and now CMS is going to push it to the upside.
Another energy company that we have opened this week is XEL, Excel Energy Inc., it’s fighting 65$ resistance and we think that it’s going to continue on good revenue and earnings.
What did we close this week? We closed Intel this week. We closed ALK .
So to conclude, if we’re concluding this market outlook; we think that the market is bullish to the upside slightly. We think that the market has some room to go to the upside. It’s not going to be a straight line. There’s going to be some choppy ride especially in the midst of the earning season. We think that optimism should be in place because the UK is going to hit the Brexit hopefully and the US and China are going to be making a deal regarding phase one.
So, cautious optimism in the horizon. Regarding technicals, as we said, directionless in the short term. In the longer term, we see a ascending triangle formation which means that the market is going to have to make a decision towards the end of the year, maybe the beginning of next year. And we detailed some of the ticker symbols that we have open positions in and some that we have closed.
As always, if you have any suggestions and comments, please do not hesitate to shoot me an email to alon@alphaoverbeta.net. And I’ll be more than happy to comment. Thank you again and have a great trading week.
Alon