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U.S. Stocks: Storm Clouds Gathering as Tech Sector Enters Correction

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July was a stellar month for Wall Street’s major indexes, as positive earnings surprises and pro-growth optimism propelled the S&P 500 Index to its highest levels since January. But a closer look at sector rotations and the recent performance of Corporate America’s most popular bets paint a very murky picture of what’s to come.

Correction Ahead? It’s Already Here

U.S. stocks are showing signs of “exhaustion” and could be headed for a major meltdown in the not-too-distant future, according to analysts at Morgan Stanley. In a note to clients that was published on Tuesday, Stanley warned that sectors tied to technology, consumer discretionary and small caps face the greatest risk.

“With Amazon’s strong quarter out of the way, and a very strong 2Q GDP number on the tape, investors were finally faced with the proverbial question of ’what do I have to look forward to now?’ The selling started slowly, built steadily, and left the biggest winners of the year down the most. The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February,” the bank said in its note.

In market speak, a correction is characterized as a fall of at least 10% from a recent high. Crashes that lead to bear markets are observed when a stock, commodity or index falls 20% or more from its latest peak.

Using the above criteria, roughly 40% of the S&P 500’s information technology index is already in correction territory. Stocks like Facebook (FB) and Netflix (NFLX) – members of the prestigious FAANG category – have declined by at least 20% from their recent high. The broader Fang+ index, which also includes Twitter (TWTR), Nvidia (NVDA), Tesla (TSLA), Alibaba Group (BABA) and Baidu (BIDU), has also fallen into correction territory.

Facebook recently made history by shedding $119 billion in market cap in a single day of trade – the most on record – following a disastrous earnings call that raised doubts about the social media giant’s moneymaking prowess. Share prices have yet to make a meaningful recovery.

Growth vs. Value

With Morgan Stanley warning of “a rolling bear market” in the future, a researcher at Nomura Holdings just uncovered the biggest rotation from growth stocks to value stocks since the 2008 financial crisis.

Charlie McElligott, an executive with Nomura’s cross-asset strategy unit, said the rotation occurred over a three-day span, which revealed a standard deviation of 4.3 in the ‘Value/Growth’ ratio relative to ten-year returns. Basically, this means investors have diverted large swathes of capital from growth stocks to assets with lower prices relative to their fundamentals.

On Wall Street, growth stocks are associated with high-quality, successful companies whose earnings are expected to continue outpacing the market. Companies in this category usually have high price-to-earnings (P/E) ratios and high price-to-book (P/B) ratios.

Value stocks, on the other hand, have low current P/E ratios and low P/B ratios. Investors buy into value stocks on hope that the company will increase in value once the broader market recognizes its potential.

If this trend continues, it likely means that portfolio managers are shifting into a defensive posture through a traditional value investing. approach This would mark a significant departure from the high-flying bull market, which emphasized growth picks.

To be sure, not everybody agrees that were are seeing a rotation from growth to value. Other analysts contend that the recent shift is about selling winners following the record surge in tech shares. That said, investors should expect more volatile swings in equities post-earnings season.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 666 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Analysis

Black Friday: How to Capitalize on It

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

The most interesting event this month in the US is the famous Black Friday, the day of large discounts, which is on Nov 23. On this day, Americans make 45% of all their annual purchases. The US economy is doing well compared to other countries, with the Fed hiking the rates in order to cool the markets down. The unemployment rate is at its record lows, which means people have money, and there’s going to be much hype about the Black Friday as usual. With this scenario, a few companies may show great potential during Q4. First, there’s e-commerce that is a very strong competition against offline stores. Amazon (NASDAQ: AMZN) is the leader here, with the market cap of $1T. In Q3, Amazon made a record high when it comes to quarterly earnings. However, the chart shows it is Q4 that is going to be the most profitable for the company.

Unluckily, after the Q3 report, the price was unable to reach new highs. Investors’ expectations were higher than the data that came out, which led to the share price going down. However, Amazon did make profit, and there’s a good trend in it. Furthermore, Amazon management expects to book the record profit in Q4 2018. In October, we analyzed Amazon and said the company stock is going to trade at around $1,400. It is now trading at its low at $1,476, however, and is above the 200-day SMA. When the price goes below $1,700, the volumes get much higher, according to the chart. Thus, this may be the support the price may start recovering from.

If the earnings expectations are met, Amazon may well rise above the round number of $2,000. Another large company that may get nice profits is eBay (NASDAQ: EBAY), which is mostly centered around e-commerce, too. The profits are good here, while the stock price leaves much to be desired.

Still, eBay incomes are rising quarter to quarter. According to the expectations, Q4 is going to be the most profitable in the recent few years.

Over 2018, eBay stock went down by nearly 30%. Perhaps, the reason for that is the increasing debt, with the debt to equity ratio now being 1.11, while, for Amazon, it is just 0.63. Technically, the stock went down till November last year, too, while after the Q4 report it traded at its highs. This time, the stock looks somewhat weaker than before, and may only reach $36 or so.

Walmart, an offline store chain, may also be included into this list, as this company is sure to get good profits thanks to Black Friday sales. Nevertheless, while eBay and Amazon shares corrected before Q4, Walmart is rising and is trying to break out its record highs made a year ago. Walmart earnings, like internet giants’ ones, are sure to be sensitive to the sales before Xmas.

The company reports its earnings on Thursday, and they are expected higher than the same quarter last year. The income is visibly growing up, and the record highs for Q4 earnings expectations are quite logical. Walmart has been recently going up thanks to large hedge funds positions, with around 52 funds now including this stock into their portfolios.

Technically, as said before, the stock is quite strong. The price is currently above the 200-day SMA, showing good growth and ready to hit new record highs. As for the entry, it’s hard to determine the risk. The nearest support levels are $100 and $90, and once the price reaches either, it could be a good entry point for the next few months.

 

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 17 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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Analysis

Time to Focus on General Motors

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

As earnings season continues, analysts have been bewildered by General Motors’ (NYSE: GM) report.  Over the last year, GM shares became 35% cheaper, while income was mixed, both rising and falling, and net profit turned positive only in late 2018.

The GM stock price has been under pressure, most likely because of rising debt. General Motors went bankrupt in 2009, liquidating all previous debts, but new ones started appearing soon. The debt-equity ratio reached 1.93 ever since, making it a serious question whether or not to invest in such a company that had previously been bankrupt.

Since the second IPO in 2010, GM shares have been unable to overcome the 30% rise barrier, while the DJIA rose by over 100% over the same period. This made interest in GM quite low.

With ever-growing debt and shareholder pressure, the company had to cut expenses, and this was done through cutting jobs and closing factories in various countries. For instance, the GM Korea factory is likely to get closed, with over 2,000 jobs cut. Another factory, located in Saint Petersburg, Russia may be closed, too. Meanwhile, in North America, around 36% of jobs were cut.

Overall, the former multinational giant is leaving the markets in Europe, Indonesia, Thailand, India and Australia. The company may end up present only in the US and China.

Naturally, running a company with multiple branches in multiple countries is much harder than the one working in a single country. A good example is Tesla, which in 2008 was saved by a single contract with SpaceX (both owned by Elon Musk) worth $1.8B, while General Motors was unable to do with even $30B.

After the 2008 crisis, US automotive companies faced serious issues. Ford Motor, for example, has not shown any good results ever since, and is still trading at its 2010 lows.

Nevertheless, in mid 2018, Warren Buffet’s fund disclosed information on its Q2 portfolio that included Apple (Buffet said he would like to control 100% of Apple shares), Goldman Sachs, Teva, Delta Airlines and General Motors. If GM is on this list, other investors might also want focus on it.

Meanwhile, in Q2, GM shares rose sharply by 10%, which was the result of an agreement between General Motors and an investment fund run by SoftBank Group, the Japanese telecommunication giant. The fund invested $2.25B into the autonomous taxi development led by a part of GM team.

Thus, Q2 was overall positive for GM, and while the stock price did not increase significantly, the net profit did. As a result, the Q3 report was great, beating all expectations.

The net profit in Q3 reached $2.53B, or $1.75 EPS, against the $2.98B loss, or -$2.03, reported last year. The yearly EPS is expected at somewhere between $5.80 and $6.20, though GM management assumes it could be even higher.

Around 86% of net profit comes from the North American market, while only 14% covers the rest of the world. This is quite in line with the company’s policy regarding closing its regional branches.

Meanwhile, car production was lowered by 14.70% compared to last year, but GM succeeded thanks to the price increase and truck sales, where the yield is higher.

Technically, the price is still below the 200-day SMA, which may push values to the descending trend line which was broken out thanks to the positive report. If the price then bounces, it may rise above $40. GM management’s prediction on beating the yearly profit expectations may be priced quite soon, while then the yearly report comes, the price may head down. The Buy Rumors, Sell Facts rule may well work here.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 17 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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Analysis

Google Being Lackluster, Amazon Earnings Skyrocket, Tesla Leaves Everyone Behind

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

Last week was rich in Q3 earnings reports. Volatility was not very high, and while many companies were profitable, some large ones were unable to keep the pace up and went lower during the trading session. As a result, the stock indices continued going down as well. With positive reports across the board, stocks went down because actual earnings fell short compared to the expectations.

For instance, Alphabet (NASDAQ:GOOGL) earnings were up by 3.50% compared to the previous quarter, but the stock still lost 7% when the report came in, as the expectations were higher.

Starting April 2016, Alphabet reports have always beat expectations, and once it did not happen, the market reacted accordingly.

Another negative development for Alphabet is that 2018 earnings came lower than 2017, which was never the case before.

Technically, Alphabet is weak, too. The price has already broken out the 200-day SMA, which had been acting as support over the last two years. Now, Alphabet will be most likely testing the round number of $1,000, which looks like a good entry point for long trades. Conversely, if this level is broken out as well, unpredictable events may follow, with the price sinking as low as to $800.

While Alphabet went low because of not meeting expectations, Amazon earnings hit records, but it still did not help it to reach new highs as the price finished the trading session in the red.

According to the report, Amazon’s net profit went up by 1,126%. Still, it failed to meet expectations.

The selloff was mostly related to the next quarter expectations that appeared to be far less optimistic. Q4 is, after all, holiday shopping season.

Technically, Amazon shares are trading around the 200-day SMA, which acts as support. Last, the price tested it in early 2016, after which the price went from $500 to $2,000. Then, it formed the double top reversal pattern, and has already reached its downtrend target. There’s a support at $1,600, and in case the price bounces back, it may reach $1,860. At this support, there was the largest volume spike in 2018, which means the price may continue rising further.

Unluckily, the overall outlook shows the price is unlikely to hit new highs, as there’s a strong resistance at $1,900. If the price bounces off it, this may lead to a major fall.

Of course, one should also mention Tesla’s report, after which short sellers suffered losses again. They are likely to get used to it, however, and some of them are already changing their mind.

Tesla has been around for 15 years, and it’s only the third time it was able to finish a quarter in the black. According to the Q3 earnings report, the company recorded a net gain was $312M, which was unexpected by most analysts, as the outlook was negative.

Elon R. Musk kept his word in achieving the target of Model 3 production; this was the main reason for the company being able to record its net gain. Musk now says Tesla is capable of making net profit each quarter from now on.

In Q3 Tesla succeeded in selling 55,840 Model 3 cars, earning a $3B profit, which is 3 times higher than last quarter.

The Q3 earnings report also changed news sentiment. Now, Tesla is referred to as ‘the best electric car manufacturer’. Meanwhile, Musk is going to create new factories in China and the EU in order to reduce customs duties and transportation costs. In order to succeed against Model 3, the competition will have to spend a few years on R&D before reaching more or less the same level.

Traders are very much interested in Tesla news, which can be easily traced on the charts. The news pieces are very different, and while today the media may say Tesla is prospering, tomorrow they may post something like ‘Musk went high and made another $20M tweet’. With such contradictory news, it’s no wonder why the stock is trading within such a wide range.

Over the last two years, Tesla shares have been trading between $250 and $400, while volumes go way higher when the price approaches $250. The 200-day SMA is at the same level, and it has been supporting the price over the last 4 years. This time, after the report came out, we can expect the price to break out $400 and hit new highs, even with US indices falling.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 17 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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