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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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4.7 stars on average, based on 743 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

Goldman Sachs: Even a $7.50B Fine Can’t Take Them Down

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

Last week, Goldman Sachs Group Inc. (NYSE: GS) published its Q4 earnings report, in which the main financial indicators exceeded all analysts’ expectations.

The net profit amounted to $2.54B, well above expectations of $1.78B; the revenue reached $8.12B compared with a forecast of $7.5B; finally, the net interest income rose to $898M versus an expected $758M.

The chart shows that Goldman Sachs’ revenues always exceeded the forecast figures. In 2017, the forecasts were quite conservative, with the actual results not much different. In 2018 this bias was already smaller. Based on the data from the chart, one can conclude that 2018 was not the best year for the bank, with revenues falling as predicted, which led to a share price fall, too. Over 2018, the stock lost almost 45% of its value.

Early in the year, the stock was still near the historical highs; then, after the Q1 report release, the price went down, as the report showed worse figures than expected.

Now, the price is increasing sharply, bouncing off its lows. Investors tend to first pay attention to the expected figures, especially if the company has been operating in the market for a long time. In such situations, news has a short-term impact on the price, as this has may times stood the test of time. Goldman Sachs was no exception.

The news on the Malaysian scandal, which broke out in 2015, is still here to stay. The Malaysian authorities accuse bank representatives of bribing officials to get an order for bond placement in 2012-2013. The revenues from those bonds, i.e. $6.5B, were just taken away, without any hint on using them for the local investment. In response, Goldman Sachs pointed out that the bonds were placed for the purpose of raising money for Malaysia, but instead part of the funds was stolen by members of the Malaysian government. As it turned out, the then Prime Minister of Malaysia, Najib Razak, was indeed found to have $681M in his accounts. This was a dead end, however, and indeed officials were very unlikely to punish themselves. Now, when Razak lost the election, the new government launched an anti-corruption investigation and Najib Razak was accused of money laundering, while Goldman Sachs was also charged.

In mid 2015, the stock actually declined, which lasted about a year. Overall, the fall was 37%, but then Goldman was out of the Malaysian scandal and media spoke about corruption in the Asian country. Meanwhile, in Malaysia, people knew very few things, as the media was tightly controlled by the government, and those who dared to report it were immediately closed. As such, The Insider, a Malaysian media, was closed after the very first publication of the article hinting on government corruption.

Therefore, linking the stock decline to the scandal does not work. However, if you follow the chart of the company’s revenues, you’ll understand what really happened.

The chart shows that the revenue forecast for the second quarter of 2015 was already declining, and when the Q2 real income was less than the previous one, both the stock and the prediction went down. Thus, the price directly responded to the decline in forecast indicators for revenues, and the news factor here had virtually no effect on the stock.

In 2016, the stock started recovering with the expectations also going higher. Therefore, the current growth in the value of the stock is directly related to the expectations of the growth of Goldman Sachs earnings in Q1 2019.

As for the possible fine, David Solomon, the Goldman Sachs CEO, decided to play it safe: the bank has already started accumulating money for it.

Technically, on W1 the stock is quite weak, being under 200-day moving average, but in spite of this, there’s still an uptrend, as the MA is going up.

When the stock fell down to its lows at $160, the volume increased drastically, which is one of the most evident signs of a reversal. This will be further confirmed once the 200-day MA gets broken out and the price stays above. But since the price went up sharply from its lows and increased for 4 weeks in a row, a small correction may happen as well.

The price may bounce off the 200-day MA and fall back to $190, after which the rise may resume.

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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4.6 stars on average, based on 26 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

AMD: Time to Find the Bottom

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By Dmitriy Gurkovsky, Chief Analyst at RoboMarkets

With the crypto hype nearly over, it’s time to see what’s happening with graphic board manufacturers. When demand boomed, their earnings burst, and so did the stock prices. Currently, however, the demand is down, and this is clearly seen in the earnings reports. While previously the earnings reached rather high numbers, they are bound to start shrinking now. What is important here is whether the management at such companies used the large capital inflows to take the companies’ performance to the next level.

Today, we’ll take a closer look at Advanced Micro Devices, known as AMD. We could also consider Nvidia (NASDAQ: NVDA), but its stock is seven times more expensive than AMD’s, which means it is much less available to the retail investors.

AMD earnings had risen by 2,200% when the crypto boom was at large, while Nvidia added 1,500% to its value. At the same time, when AMD shares were at the low, they cost around $1.50, which was quite alright for retail traders, while Nvidia shares were 15 times higher.

Advanced Micro Devices (NASDAQ: AMD) is a major GPU and chip set manufacturer. The company hasn’t had any production facilities of its own since 2009, and uses other companies’ facilities. Among AMD’s partners, one may mention Acer, Cisco, Dell, Ericsson, Fujitsu, HP, IBM, NEC, Nokia, Siemens, and Sony.

The major competition of AMD is Nvidia. In 2010, AMD was better than Nvidia, when its market share amounted to 51%. It was actually in 2010 when the first Bitcoin transaction was made. This was the jump start for the cryptos and, eventually, for mining devices.

By 2018, the crypto market cap reached its high at $840B, followed by the fall that has so far reached $119B. This caused a high demand for used GPUs, while the demand for new devices fell; this eventually led to the falling AMD sales. Investors booked their profits, and AMD shares fell, too. The earnings will continue going down, and the company will have to distract the investors from this.

The forecast for earnings in the coming quarter is not positive either, which means the stock has not reached its bottom yet.

AMD: What Happened Recently

In October, the Q3 report came in, with both the earnings and the ROI rising YoY. The operational profit went up to $150M, while the net profit rose by 70% to reach $102B. However, even with the earnings rising (mostly due to the CPU sales), the stock went down by 22% just because GPU sales shrank. When this happened, Deutsche Bank, Mizuho, and Morgan Stanley cut their forecasts regarding AMD share price.

In November, AMD partnered with Amazon to supply Epic CPUs for Amazon data centers. This pushed the price by 9% in the short term. Another price spike happened in December, when the 90-day ‘cease-fire’ was achieved in Sino-US trade wars; this was perceived as positive news for tech companies, and, in particular, pushed the AMD price by 7.50% upwards.

After that, the rise was over, and the shares were falling for 20 days in a row. The last hope was the Radeon IIV GPU release, which was presented at the CES expo on January 9, 2019. The stock started to recover but then went down abruptly.

This whipsaw may continue for long. What one may do is pay attention to the next quarter forecasts and do the tech analysis, while also watching the current and past events.

As such, some figures may show AMD’s strong points.

Thus, the equity ROI is 28.44%, with the overall industry number being at 11.84%; the profit margin is 5.05% versus 2.06%. On Dec 20, 2018, AMD was added into NASDAQ 100. Every year, the amount of data to process is increasing, while making the CPUs and GPUs smaller gets more and more difficult. This is likely to increase the demand, and, subsequently, increase AMD earnings, too.

On the dark side, AMD is not currently paying any dividends, while the P/E is 49.50 versus the 14.85 industry average, which means the company is well overpriced. The forecasts for the next quarter earnings are negative, which may put the AMD shares under pressure, too.

Thus, AMD shares may shrink in the short term, but in the longer term, they look quite attractive for investment. In order to understand where the price is going to ‘take off’, one should use tech analysis.

On W1, the price is above the 200-day SMA, which means there is an ascending trend. Fundamentally, however, the price may get lower, perhaps finding its support at the 200-day SMA.

The secondary support levels are at $10 and $15. $15, the nearest one, is very likely to get broken down, as it is quite far from the SMA. If the sellers get more active, the price may head further lower to reach and even break out $10. However, the odds are that the breakout will not continue for long, and a recovery will follow immediately. Thus, $10 may be considered a good level for taking long positions.

On D1, $22 is a currently strong level. In case it does not get broken out soon, it may become then a starting point for the price to start heading towards $10.

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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4.6 stars on average, based on 26 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

Johnson & Johnson: Not the One to Go Down?

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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

With the new season ahead, investors’ fears are fading out. The market is trying to find its bottom and bounce off it, if somewhat timidly. Few investors were bold enough to get into risks before the New Year, most preferred to lock in their hard-earned profits, which subsequently led to the overall downtrend.

There were some other reasons, too, though. The quarterly reports went better and better, which first was a good signal for keeping stocks within the portfolios. However, in Q4 2018, some companies were barely able to meet expectations, while others set their expectations way lower for the future periods. Facebook, for instance, was unable to meet expectations for two times in a row, despite the profits hitting the record highs. Meanwhile, Apple met expectations, but iPhone sales went significantly lower in Q4. General Motors revenues were completely based on automobile prices, while sales plunging, too. Some of these issues are due to the Sino-US trade war, but even without it the market would have gone down anyway, if at some higher price levels. Every company has its limit, and once it’s reached, a correction is inevitable. On the other hand, every company makes progress through innovative ideas, and when it manages to create a new unique product or service, its price goes drastically up.

Speaking of Facebook, Zuckerberg’s company multiplied its revenues more than threefold, from $4B in 2015, to $14B. Alphabet, the parent company of Google, succeeded in growing its revenues from $18B to $34B. Apple earnings are not growing as fast as Google’s, being very choppy, and it looks like the tech giant hit its iPhone sales limit. In 2015, Apple earned $58B, and had only 13% more by late 2018. The management finally opted for not disclosing the sales data, which had a very negative effect.

These figures do not look that impressive at first sight, and one may even think they could be way bigger. On the other hand, however, just think of it: a single US-based company earnings are bigger than the entire GDP in Bulgaria, Luxemburg, or Croatia.

Meanwhile, crude oil lost over 40% over the last three months. The stock indices, led by the S&P 500, followed in the same manner they had followed the rising crude price in 2017. This makes one think the indices will start rising as soon as crude finds support and bounces. Cheap crude is bad for exporters, while for other countries, it is a great tool, as producing nearly each and every product (or at least its packing or shipping) requires oil.

Whether crude has already found its support, or it will continue falling, remains to be seen. Investors are now interested in the crude and indices, but not that much so as to make the things really optimistic and push the prices higher. A fall is quite possible anyway, and the currently open long positions are under considerable risk.

When indices are going down, fear in the markets is so great that people sell even the stocks of the companies that are doing rather good. In order to provide the appropriate reasoning, the analysts usually remind the markets of a piece of negative news, even long-gone and forgotten. The stock then goes well bellow the oversold territory, just to give the investors a better opportunity to buy it later.

One of such oversold companies, with the stock price going down with no particular reason, is Jonson & Jonson (NYSE: JNJ), which includes over 250 child companies throughout the world. Johnson & Johnson produces medicines, hygienic products, and medical equipment. It was founded in 1887 by three brothers: Robert, James, and Edward Johnson.

Financially, the company is very much stable, and its earnings are rising steadily.

The chart below shows the earnings always beat expectations in 2017, which allowed the stock price to hit the historical high.

The price chart shows a very clear uptrend, with the price always being above the 200-day SMA, the latter acting as a support. In mid 2018, however, the stock lost as much as 20%, in a very short time frame. The earnings report was good, but the overall outlook was spoiled by the court decision, upon which J&J was fined at $4.70B.

The complainants affirmed that the baby dust produced by J&J contained asbestos, which may cause ovarian cancer. The similar trials had already been held in 2007, when the company first had to pay $417M to the injured US citizen, but later the decision was revoked, as no proofs for the event of crime were found. At that time, the market barely reacted at that legal action, probably because the amount was not that high.

It is quite high this time, though, so the news could not have gone unnoticed anyways. It was already priced into the stock in July 2018, however, as this is when the court took this decision. Ever since, the price went up again, and good earning reports pushed the price to the new all-time highs.

The ascending trend could well have continued, had it not been for the indices. Those fell considerably, and Johnson&Johnson was unable to stand ground. In order to justify the fall, the company remembered the legal action, which only made this fall steeper.

The situation was so grave that J&J had to announce it was going to buy the shares out for $5B, with the management considering the low price as an attractive investment opportunity.

Meanwhile, a recently concluded research, that had been in progress for decades, showed that American women living in the rural areas suffer from ovary cancer more often than those living in cities, although it is in cities when you find asbestos far more often. This means the connection between asbestos and cancer, if it exists, is not obvious.

Another research, however, highlighted that using amphibole asbestos led to the growing number of cases of occupational diseases. Amphibole asbestos is nowadays forbidden around the world.

The information on this research came roughly at the same time as the court decision on J&J. Nobody wanted to consider it all in detail, and which kind of asbestos it was about.

The whole story was so much overblown that each and every US citizen can now claim compensation from Johnson&Johnson. If this goes around the thousand of cities and towns J&J operates in, it could well lead to bankruptcy.

How you want to act in this market situation, remains up to you. You’ve got the crazy tumult on the one hand, and the logic on the other. The logic says the scandal is pretty much overblown, and those who initiated it are sure to lose in the end. Who is going to win then? Those who will control their emotions and take a weighted decision on buying the underpriced stock. This is because, now, the stock is far more likely to rise than to fall, both according to the overall situation and the fact that the trials started as early as in summer 2018.

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 Company 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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4.6 stars on average, based on 26 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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