Stocks Fall Further on Treasury Yield Rally

Summary of content for the week of  Feb 26:

1. Week 8 major indexes performance;

2. Week 8 US sector indexes performance;

3.Major indexes weekly charts of support and resistance levels;

4. Major Indexes monthly performance for Feb

U.S

U.S three major indexes fell sharply for the week ended Feb 26, in response to a steep rise in longer-term Treasury interest rates. SPX recorded its biggest weekly decline in a month, Nasdaq suffered its worst drop since October, both indexes had 2nd week down in a row, while DJI index also ended its 1st week down. 

While the Nasdaq index has risen over 100% since Mar low, SPX also added 80% in the same period, there are profit-taking pressures on equities and also another major factor as all eyes on treasury interest rate rally for the last few days. Below are the main reasons why the Treasury interest rate rallied and stocks fell:

1. 10-year Treasury rate has risen to about the same level as S&P 500(SPX) dividend yield. It hit the highest 1.614% on Thursday whereas the SPX dividend yield is at 1.48%. Treasury yield is often viewed as the risk-free rate, so when investors buy the risk-free 10-year treasury can get a higher/same return as the risk asset SPX, they will prefer to sell the stocks and buy the Treasury which is more attractive. 

2. But why treasury yield rises in the first place? This is related to the U.S government fiscal stimulus plan.

U.S treasury yields have been on the rise for the last two months on EXPECTATIONS of increased issuance of Treasuries to finance a massive stimulus package and prospects of a recovery as the world's largest economy emerges from the pandemic.

The cause and effect cycle goes like this: Government to have fiscal stimulus plan-->Need more money-->Sell more treasuries in bond market-->Treasuries price drop-->Treasury yield rise(bond prices and yields move in opposite directions.)-->Mortgage-related(MBS) selling on Treasuries 

-->Treasury price drop further--> Treasury yields rise further.

So how could it be possibly stopped? The central banks around the world are taking action or considering taking action by buying up the excess supply of bonds to support bond prices. Australian central bank was reported on the front line bought A$5 billion of bonds Thursday.

Stock Rotation amid rising yield. Value stocks such as cyclical stocks and pandemic badly hit stocks performed better than growth stocks such as technology stocks. Most of these tech stocks are unprofitable therefore rising long-term yield will have a bigger discount on their future earnings, so they appear more "expensive" now. Energy(XLE) and Financials(XLF) are the two top-performing SPX sectors for the week, whereas Technology(XLK) and Consumer Discretionary(XLY) are lagging. Refer to below SPX sector indexes weekly performance table.

Technically, all three indexes DJI, COMP and SPX weekly uptrend are well intact. and the U.S House just passed the US$1.9 trillion aid bill on Friday and send it to Senate for a vote. Any good news out in the coming week should provide chances for markets to rebound. Hopefully.

China/HK

China stocks fell in tandem with the global sell-off. SSE index shed 5.1% and HSI plunged 5.4%, was the worst index in my Inde weekly performance table above. Profit-taking in high flying stocks related to Semicon, electric cars, and automaking. Both SSE and HSI indexes weekly uptrend are still intact.

Singapore

STI was the best performing and the only index that recorded a positive return this week, with 2.4% gains. As there is a lack of tech stocks but more heavyweight value stocks in the STI index, such as the three banks. i.e DBS, OCBC and UOB. STI index is expected to continue to perform well going forward with an immediate target of 3100, as the pandemic under control and economic recovery. 

Rising Rates Weight on Stocks

  Summary of content for the week of  Feb 19:

1. Week 7 major indexes performance;

2. Week 7 US sector indexes performance;

3.Major indexes weekly charts of support and resistance levels;

3.Major indexes weekly charts of support and resistance levels;

U.S

U.S three major indexes finished the holiday-shortened week mixed and very near the flatline, with DJI index the only one closed positive. SPX and Nasdaq(COMP) hit fresh record highs but closed down by profit-taking, attributed to the upward move in interest rates. 

The 10-year Treasury yield of 1.34% on Friday close rebounded back to its level one year ago when pandemic outbreak. Despite the sharp rise recently, the rates remain historically low. Take a look at below 10-yr Treasury Rate(%)

Source: Bloomberg

Analysts opined the recent rise in interest rates that has been driven by higher expected inflation, and by potentially less Fed stimulus. Given that the rates remain historically low and ongoing negations over the coming fiscal-aid package, Fed's dovish stance to keep short term rates accommodative to economy recovery, the rising rates unlikely derail the favorable fundamental outlook. 

An increase in longer -term interest rates are unfavourable on fast-growing technology stocks, by raising the discount rate on future earnings. Technolgy(XLK) among the laggers in the SPX 11 sectors indexes as shown in below weekly sector indexes performance table. Conversely, the increase in rates favored bank shares by boosting lending margins and helped value shares outperformed growth stocks. Financials(XLF) are among top performing sector indexes for the week. Energy(XLE) was the best performing index as bad weather forced to shutdown the massive oil and gas infrastructure, reducing the oil supplies. 

China/HK

China SSE index rose 1.1% in just two-trading days, after reopened from 7-day long Chinese New Year holiday.  The HSI index in Hong Kong was the best performing index for the week, with 1.6% gain. Both SSE and HSI are in a bullish trend and expected to rebound further.

Singapore

STI index reversed down from its two-week up streak, closed at 2880 level where it had a bullish breakout seven-week ago, now becomes resistance-turn-support level technically. Expected the index will have limit downside with major support level at 2880-2800 going forward. Top pick DBS bank.

Stocks Hit New Highs Bulls are In Charge, Happy Lunar New Year

  Summary of content for the week of  Feb 12:

1. Week 6 major indexes performance;

2. Week 6 US sector indexes performance;

3.Major indexes weekly charts of support and resistance levels;

Wish all Readers Happy Chinese New Year, good health and fortune in the year of Ox!

U.S

U.S three major indexes notched a 2nd week of gains and reached record highs heading into the Presidents' Day long holiday weekend, helped by strong earnings growth, picked up distribution of vaccine and the increasing likelihood of additional fiscal stimulus. 

Among the 11 major SPX sectors(refer to below sector indexes weekly performance table), the cyclicals Energy(XLE),Technology(XLK), Communication Services(XLC) and Financials(XLF) are among top performing sectors and defensives such as Utilities(XLU) and Consumer Discretionary(XLY) are lagging. 

China/HK

Chinese markets rallied ahead of the Lunar New year holiday. The SSE index gained 4.54%, was the top performing index in my major indexes weekly performance table below. SSE index hit multi-year new high since Dec 2015.HSI index was the 2nd best performing index for the week, also closed new high since Apr 2019. 

As laggers last year, the Asia major indexes SSE, .HSI and STI expected to catch up this year along with positive economic outlook. 

Singapore

STI edged up for 2nd week of gains. Singapore as a small country still facing lots of uncertainties on its road of recovery from Covid-19 pandemic, its benchmark index STI is picking up slow and steadily. Expected plenty of room to upside with immediate technical target is at 3100 level. 

Bulls Regain Control, Hit Record Highs

  Summary of content for the week of  Feb 5:

1. Week 5 major indexes performance;

2. Week 5 US sector indexes performance;

3.Major indexes weekly charts of support and resistance levels;

U.S

U.S stocks finished solid higher, recovered all of last week's declines helped by fiscal stimulus plans and vaccine optimism. SPX, Nasdaq indexes all reached record highs. Energy stocks outperformed as crude oil prices hit their highest level in over a year on a surprising decline in U.S reserves. 

Nasdaq(COMP) added 6.01% for the week, was the top performer. Among 11 SPX sectors, Materials(XLB) outperformed and Healthcare(XLV) and Consumer Discretionary(XLY) stocks lagged. 

Short Squeeze Unwinds. The social media Reddit coordinated "short-squeeze" targeting hedge funds short-sellers with positions in GameStop and a few other companies also abated(#GME price dropped more than 80% this week), buyers turned their attention instead to the silver market, sending silver prices to their highest level since 2013. 

China/HK

Shanghai SSE index rose for the week. Sentiment improved following reports that Alibaba group reached an agreement with regulators over the restructuring of its fintech affiliate Ant group, whose record USD 34.4 billion IPO was canceled in November. 

Kuanshou IPO. In HK, a record oversubscription by retail investors for the USD 5.4 billion IPO of Kuaishou Technology(1024.HK) revealed huge investor appetite for Chinese tech companies. Shares of the short video-sharing app surged 161% in its HK public trading debut on Friday, making it the largest IPO since Uber went public in 2019, according to Bloomberg. 

Singapore

STI index rebounded this week after a two-week down, current index level supported by its 50dma at around 2890. Upside immediate resistance at recent high 3017 level. 

Stocks Continue to New Highs on Stimulus Hopes

  Summary of content for the week of  Jan 22:

1. Week 3 major indexes performance;

2. Week 3 US sector indexes performance;

3.Major indexes weekly charts of support and resistance levels;

U.S

Major three U.S indexes closed new high for the week, despite retreat on Friday. In focus is the $1.9 trillion stimulus plan and worsening coronavirus news, coupled with the vaccine rollout. 

It's expected the bull market has further room to run, though a period of consolidation and short term pullback is highly possible as markets have already priced in improvement in fundamentals. Rising corporate earnings and easy Fed policy are a powerful combination for rising stock markets. 

Among 11 major SPX sectors, five sectors closed positive and six sectors closed in the red. Communication services(XLC) outperformed for the week, boosted by sharp gain in Netflix. Technology(XLK) also very strong. Financials(XLF) and Energy(XLE) lagged. Refer to below sector weekly performance table for details.

This week will see more corporate earning results out. On Wednesday Jan 27, the three heavyweights Apple(AAPL), Tesla(TSLA), and Facebook(FB) will report their earnings. 

China/HK

China's SSE index rallied amid strong economic data and on hopes of warmer U.S-China relations under Biden's administration. China's 4Q GDP growth accelerated to 6.5% yoy, making it the only major economy to regain its pre-virus trend. Both SSE and .HSI weekly charts have had a four-week rally in a row, seen strong buying interests in Chinese stocks, especially Chiese technology stocks, such as Tencent(700hk), Alibaba(9988hk),Meituan(3690hk) etc. Technically both indexes appear to be overbought after a recent rally, expected short-term consolidation or pullback before a further upside move. 

Singapore

STI has a good start this year but it still has far more room for upside to catch up. Immediate technical resistance at 3100, expected the banks and Semicon names will perform better. Semicon globally under huge demand this year, Singapore-related companies such as AEM, UMS, Micro-mechanics etc expected to perform better. 

Stocks Declined Sharply as "Short Squeezes" Drive Unsual Price Action

 Summary of content for the week of  Jan 29:

1. Week 4 major indexes performance;

2. Week 4 US sector indexes performance;

3.Major indexes weekly charts of support and resistance levels;

U.S

Major Indexes SPX, DJI and COMP(Nasdaq) recorded their largest weekly loss in three months. SPX ended in a five-week low. Technically SPX closed at 3714.24, just beneath its 50dma at 3715.95 level, immediate technical support at 3630-3645 level if it continues downside move. All three indexes' major weekly uptrend still well intact. 

Major indexes performance for the month of Jan. SPX and DJI have given back all their gains and ended in red YTD. HSI index is the best index with 3.9% YTD return. 

Market Hotspot- GameStop and Short Squeeze

GameStop(#GME) was targeted by online forum Reddit the "WallStreetBet" (or is commonly referred as "WSB") to aginst the establishment "big-boys" short-sellers, due to its more than 100% short-selling interest by those institutional short-sellers and hedged funds. In a short trade, which is a bearish position, an investor borrows shares and sells them, hoping to buy them back at a lower price in the future.

What is "Short Squeeze"? In a "short squeeze", a rising stock price can force short investors to buy back the shares at a higher price, incurring losses on their bearish positions as they "cover" their shorts. If enough bearish investors cover their short positions, they can drive the stock price even higher.GameStop(#GME) and AMC Entertainment(#AMC) were two of the heavily shorted stocks that experience short squeezes, causing huge price gains and major losses on short positions. 

Is this market top from here? 

In short, we think this is not this bull market's end given that the fundamental outlook hasn't changed on below three aspects:

1) Outlook of the economy still on the recovery and expected to gain momentum after vaccine getting smoother. The government's massive fiscal stimulus will support the recovery.  

2) Corporate earnings are rising, offering sufficient support for current elevated valuations.

3) Monetary policy, the Fed interest rate kept at low and monetary stimulus in place for at least next two years.

SPX Sector Indexes Weekly Performance All 11 sectors ended in the red, Energy(XLE) lost the most with 6.5% down. 

China/HK

China SSE index recorded a weekly drop amid fears its central bank PBOC was turning hawkish after it drained over RMB 300 billion from the banking system in the week. SSE index ended in a four-week low, pull back to test 3450 level where it had bullish breakout 4-week ago. Technically, 3450 level is major support.

HSI index ended the first week down after a four-week rally in a row, it has formed a pretty bearish engulfing candlestick pattern on its weekly chart, which indicates potential further downside but it appears the bullish outlook has not changed, expected uptrend will resume after short-term profit-taking. 

Singapore

STI had its largest decline in three months for the week, pull back after the previous two-week sideway. Immediate technical support at its 50dma 2886 level. This year's target unchanged at 3100.