Recent breakouts

Our latest scan for breakouts turned up only one candidate on the ASX:

Premier Investments (PMV)

Premier Investments is an Australian company that operates six specialty retail fashion chains in the specialty retail fashion markets in Australia & New Zealand and also operates the unique Smiggle brand, retailing children’s stationery in Australia and overseas markets.

Not your normal candidate for a growth stock but PMV has been appreciating steadily, with shallow troughs and regular breakouts since March last year. Trend Index is declining; so we would want to see an upswing, respecting the zero line.

Russell 3000

The Russell 3000 yielded a few more promising candidates:

Inspire Medical systems (INSP)

Penske Group (PAG)

SVB Financial Group (SIVB)

Texas Instruments (TXN)

Walker Dunlop (WD)

Look for a strong Trend Index, holding above zero, and shallow corrections.

Quote for the Week

No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.

~ Ian Wilson, former GE Chairman

Nasdaq & NYSE breakouts

Our breakout of the week, Cadence Design Systems, Inc. (CDNS), is testing resistance at 150. Repeated Money Flow troughs above zero signal exceptional buying pressure. Breakout above 150 would signal an advance with a target of 1801.

Cadence Design Systems Inc. (CDNS)

Cadence Design Systems, Inc. provides software, hardware, services, and reusable integrated circuit design blocks worldwide. The company offers functional verification services, including emulation and prototyping hardware. Its functional verification offering consists of JasperGold, a formal verification platform; Xcelium, a parallel logic simulation platform; Palladium, an enterprise emulation platform; and Protium, a prototyping platform for chip verification.

Another, CDW Corporation (CDW), is testing resistance at 185. Rising Money Flow troughs again signal growing buying pressure. Breakout above 185 would signal an advance with a target of 2052.

CDW Corporation (CDW)

CDW Corporation provides integrated information technology (IT) solutions to business, government, education, and healthcare customers in the United States, the United Kingdom, and Canada. It operates through three segments: Corporate, Small Business, and Public. The company offers discrete hardware and software products, as well as integrated IT solutions, including on-premise, hybrid and cloud capabilities across data center and networking, digital workspace, security, and virtualization.

Used car retailer CarMax, Inc. (KMX), broke through resistance at 135. Rising Money Flow troughs indicate growing buyer interest. Breakout would signal an advance with a target of 1553.

CarMax Inc. (KMX)

CarMax, Inc., through its subsidiaries, operates as a retailer of used vehicles in the United States. The company operates in two segments, CarMax Sales Operations and CarMax Auto Finance. It offers customers a range of makes and models of used vehicles, including domestic, imported, and luxury vehicles; and extended protection plans to customers at the time of sale, as well as sells vehicles that are approximately 10 years old and has more than 100,000 miles through whole auctions.

A smaller breakout pattern is Medtronic plc (MDT) which is testing resistance at 132. Money Flow troughs respecting zero signal strong buying pressure. Breakout above 132 would offer a target of 1444.

Medtronic plc (MDT)

Medtronic plc develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. It operates through four segments: Cardiovascular Portfolio, Neuroscience Portfolio, Medical Surgical Portfolio, and Diabetes Operating Unit. The Cardiovascular Portfolio segment offers implantable cardiac pacemakers, cardioverter defibrillators, and cardiac resynchronization therapy devices; AF ablation products; insertable cardiac monitor systems; mechanical circulatory support; TYRX products; and remote monitoring and patient-centered software.

Wingstop Inc. (WING) broke long-term resistance at 170, signaling an advance with a target of 2255. Rising Money Flow troughs signal growing buyer interest.

Wingstop Inc. (WING)

Wingstop Inc., together with its subsidiaries, franchises and operates restaurants under the Wingstop brand name. Its restaurants offer classic wings, boneless wings, and tenders that are cooked-to-order, and hand-sauced-and-tossed in various flavors. As of December 26, 2020, the company had 1,506 franchised restaurants and 32 company-owned restaurants in 44 states and 10 countries worldwide. Wingstop Inc. was founded in 1994 and is based in Dallas, Texas.

Reminder

The above is only a technical view and does not take into account fundamental data like sales, operating margins, cash flows and debt levels. It is not a recommendation to buy or sell.

Notes

    1. Target of $180 for CDNS is calculated as the trough at 120 projected above resistance at 150.
    2. Target of $205 for CDW is calculated as the trough at 165 projected above resistance at 185.
    3. Target of $155 for KMX is calculated as the trough at 115 projected above resistance at 135.
    4. Target of $144 for MDT is calculated as the trough at 120 projected above resistance at 132.
    5. Target of $225 for WING is calculated as support at 115 projected above resistance at 170.

Acknowledgement

  1. Hat tip to SeekingAlpha.com for the company profiles.

A Tesla in the coal mine

All five US technology behemoths — Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB) and Microsoft (MSFT) — show strong up-trends over the past 6 months, boosted by strong inflows from international investors who are giving the bond market a wide berth.

AAPL, AMZN, GOOGL, MSFT, FB

But the canary in the coal mine is Tesla (TSLA), the darling of retail investors and the largest holding in Cathy Wood’s ARK Innovation Fund (ARKK). TSLA encountered resistance at 700 and looks ready for another test of primary support. Breach of 550 would signal a primary down-trend.

Tesla (TSLA)

Trading at more than 17 times sales (TTM Q1 FY21), Tesla shows spectacular exponential growth in revenues over the past ten years. But investors should be wary of extrapolating that growth as heavyweights like Volkswagen, Ford and GM invest heavily in the EV space.

Tesla (TSLA)

Also, free cash flow is patchy, reaching $3.4 billion in FY20 on a levered basis.

Tesla (TSLA)

That starts to look anemic when one takes into account stock compensation of $1.7 billion — which does not affect cash flow but dilutes existing stockholders. Adjusted free cash flow, net of stock compensation, is $1.7bn. Against market cap of $621bn that gives an earnings multiple of 365 times!

Tesla (TSLA)

If we take adjusted free cash flow for the trailing 12 months to March 2021, of $1.4bn, that gives an even higher multiple of 443 times.

Conclusion

Valuations of stocks like Tesla (TSLA) are precarious and breach of primary support levels could spark a flurry of margin calls.

Notes

  1. Revenue and cash flows are from SeekingAlpha

Stock breakouts

This is just a view of stock market activity, based on technical analysis. It does not take into account fundamentals — like sales growth, margins, return on invested capital, debt and expected dividend streams — and is not a recommendation to buy/sell.

There were two notable breakouts this week in the Russell 3000:

Amazon (AMZN) was the clear winner, breaking resistance at 3500 after forming a solid base (between 3000 and 3500) over the past 10 months. Rising Money Flow troughs signal increased interest from buyers as Jeff Bezos handed over as CEO to Andy Jassy.

Amazon Inc (AMZN)

RGC Resources (RGCO) was runner up, breaking resistance at 25 at end of the June quarter. The base is not as well-defined as for Amazon, with penetration of support at 22.50 in April ’21 before a strong recovery. Respect of support at 25, however, would confirm the bull signal.

RGC Resources (RGCO)

The closest we have to a breakout this week on the ASX 300 is Rural Funds Group (RFF). After breaking resistance at 2.40 RFF formed a loose “cup and handle” pattern1, with a sharp pullback to test support at 2.30 followed by a rally to test resistance at 2.65/2.70. Divergence on Twiggs Money Flow, with a lower TMF peak, however warns of stubborn resistance and another test of support is likely.

Rural Funds Group (RFF)

Notes

  1. The “cup” on RFF runs from August ’19 to October ’20, the “handle” from November ’20 to the present.

ASX: Financials suffer, A-REITs advance on lower rates

The ASX 200 advance is tentative, with a short doji candle signaling hesitancy, and we expect retracement to test support at 7000.  The Trend Index trough above zero indicates longer-term buying pressure. Respect of support is likely and would signal a fresh advance.

ASX 200

Financial Markets

Bond ETFs broke through resistance, signaling falling long-term interest rates.

Australian Bond ETFs

A-REITs advanced on the prospect of lower long-term interest rates.

ASX 200 Property

Bank net interest margins, however, are squeezed when interest rates fall.

Bank Net Interest Margins

ASX 200 Financials retreated to test support at 6500. The trend is unaffected and Trend Index troughs above zero indicate long-term buying pressure.

ASX 200 Financials

Mining

Mining continues to benefit from the infrastructure boom, with iron ore respecting support at $200/ton1. Troughs above zero, flag buying pressure, and respect of support both signal another advance.

Iron Ore

The ASX 300 Metals & Mining index is again testing resistance at 6000. Breakout would signal another advance, with a target of 65002.

ASX 300 Metals & Mining

Health Care & Technology

Health Care respected its new support level and is advancing strongly. Expect resistance between 45000 and 46000.

ASX 200 Health Care

Information Technology recovered above former resistance at 2000, warning of a bear trap. Expect resistance at 2250; breakout would signal a new advance.

ASX 200 Information Technology
Gold

The All Ordinaries Gold Index (XGD) is testing resistance at 7500. Breakout would signal a fresh advance, with a target of 9000.

All Ordinaries Gold Index

The Gold price is retracing to test the new support level at A$2400 per ounce. Respect of support is likely and breakout above A$2500 would be a strong bull signal for Aussie gold miners.

Gold in AUD

Conclusion

We expect A-REITs and Bond ETFs to advance on the back of lower long-term interest rates.

Financials are expected to undergo a correction as interest margins are squeezed.

Metals & Mining are in a strong up-trend because of record iron ore prices.

Health Care is recovering well and expected to test resistance.

Technology had a strong week but the outlook is still uncertain.

We expect the ASX 200 to retrace to test support at 7000 as its largest sector (Financials) undergoes a correction.

Notes

  1. Tons are metric tons unless otherwise stated.
  2. Target for Metals & Mining is calculated as support at 5000 extended above resistance at 5750.

ASX Technology stocks fall

The ASX 200 continues to test its February 2020 high at 7200. Narrow consolidation below resistance is a bullish sign but we need to keep a weather eye on the US and China.

ASX 200

Financial Markets

Bond ETFs, in a sideways consolidation, indicate that long-term interest rates are holding steady. Inflation remains muted and the RBA is following through on their stated intention to suppress long-term yields.

Australian Bond ETFs

A-REITs are testing resistance at 1500. Reversal below 1340 is unlikely but would warn of a double-top reversal.

ASX 200 REITs

Financials are testing resistance at 6500. A rising 13-week Trend Index — with troughs above zero — flags buying pressure, suggesting that a breakout is likely.

ASX 200 Financials

Health Care, Discretionary & Technology

Health Care is testing resistance at 42500. The rising Trend Index is bullish but failure to cross above zero would confirm long-term selling pressure. Breach of 40000 would complete a bull-trap (a bear signal for investors) and warn of another test of primary support at 37500.

ASX 200 Health Care

Technology broke support at 1900 to signal a primary down-trend, imitating the pattern in US markets. Breach offers a medium-term target of 14001.

ASX 200 IT

Consumer Discretionary is testing its rising trendline. We expect a test of support at 2900 as the impact of government stimulus fades.

ASX 200 Discretionary

Mining

Iron ore retreated slightly, to $210/metric ton. Chinese steel mills are stockpiling — due to rising tensions with Australia and anticipated production curbs in China (to reduce pollution levels). The boom is only expected to last as long as stockpiling continues. Then prices are likely to fall steeply as mills run down stockpiles. Reversal below support at $175-$180 would warn of a sharp decline.

Iron Ore

The ASX 300 Metals & Mining found resistance at 6000. A tall shadow on this week’s candle warns of short-term selling pressure. Another test of support at 5000 is likely.

ASX 300 Metals & Mining

The All Ordinaries Gold Index (XGD) continues to test its new support level at 7000. Follow-through below recent lows would warn of another test of 6000, while recovery above 7300 would signal a fresh advance. Breakout above the long-term descending trendline would strengthen the bull signal. Gold bullishness is fueled by rising inflation fears.

All Ordinaries Gold Index

The Gold price, in Australian Dollars, is testing its descending trendline and resistance at 2400. Breakout above the two would deliver a strong bull signal.

Gold in AUD

Conclusion

Technology stocks have commenced a primary down-trend. Metals & Mining look highly-priced and susceptible to a sharp reversal. They have looked that way for months but sooner or later we are bound to see a rapid re-pricing.

Steady long-term interest rates and a buoyant housing market are lifting REITs and Financials respectively. Health Care and Consumer Discretionary look hesitant, while Gold stocks are making a tentative rally.

Notes

  1. Target for XIJ is its 2400 peak extended below 1900.

Netflix heralds end of COVID boom for tech stocks

A sharp fall in new Netflix subscribers may signal the end of the boom for many tech companies that enjoyed stellar gains since the start of the pandemic. Economies are starting to re-open as vaccination levels rise, warning of tepid growth ahead for companies that thrived during the COVID-19 lockdown.

Zoe Samios at The Age writes:

In the first three months of 2020, Netflix acquired 15.77 million paid subscribers, sending its already elevated shares into the stratosphere. In the corresponding period this year, Netflix added just 3.98 million subscribers, its results on Wednesday morning (AEST) showed.

Netflix (NFLX) momentum has slowed since July last year. Breach of support at 500 would warn of a correction, while breach of support at 460 would signal a primary down-trend.

Netflix (NFLX)

The big five technology stocks all enjoyed a huge surge, up to September 2 last year, gaining between 28% (GOOGL) and 91% (AMZN) since early January. Since then, only Alphabet (GOOGL) and Microsoft (MSFT) have recorded further gains.

AAPL,AMZN,GOOGL,FB,MSFT

The broad S&P 500 index has gained 16.5% since September 2, 2020.

Conclusion

Growth in large technology stocks is slowing as the economy re-opens.

This time is different

The chart below compares the Wilshire 5000 broad market index (light blue) to the money supply (MZM or “at call” money). The previous two recessions show a surge in the money supply (green circles) as the Fed injects liquidity into financial markets to forestall a deflationary spiral. In both cases, stocks took more than two years to react, with the low-point reached 8 quarters after the Fed started to inject liquidity in Q1 2001 and 9 quarters after liquidity injections commenced in Q3 of 2007.

MZM Money Supply and Wilshire 5000

It took almost 13 years for the index to make a new high after its Q1 2001 Dotcom peak and 5.5 years after its Q3 2007 peak (values are plotted relative to GDP).

The recovery in 2020 was quite different. The index formed a low two quarters after the Fed started to inject liquidity and had recovered to a new high in the next quarter.

While the recovery from the Dotcom crash took an unusually long time — because of the extreme valuations — we can still conclude that the latest recovery was exceptional. Record government stimulus caused a surge in disposable incomes, rather than the fall seen in previous recessions.

Disposable Personal Income

The surge in disposable income combined with a sharp fall in consumption caused a massive spike in personal saving, much of which flowed into the stock market.

Personal Saving

Huge inflows caused a surge in stock prices, which in turn led to similar exuberance to the Dotcom bubble of 1999-2000.

“This is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It was insane, and I took advantage of the temporary insanity.” ~ Sir John Templeton, in 2001.

Conclusion

While the government attempt to prevent a fall in personal disposable income during the pandemic is laudable, their overreaction caused a massive spike in personal saving — spreading the contagion to the stock market. Stocks are now trading at precarious levels relative to earnings, with no easy way for authorities to engineer a soft landing.

We are not sure how long the Fed can prop up the stock market but are certain that it will end badly for investors who ignore the risks.

Notes

Sir John Templeton (1912-2008) was an American-born contrarian and value investor, banker, fund manager, and philanthropist. He founded the Templeton Growth Fund in 1954, which averaged more than 15% p.a. over 38 years. In 1999, Money magazine rated him as “arguably the best stock picker of the century.”

Tech heavyweights pause for breath

Good progress has been made combating the pandemic but daily COVID cases seem to be struggling to break through a floor between 50 and 60 thousand. The vaccine roll-out is ahead of schedule but people need to stop listening to idiots like Rand Paul — who went to the Senate gym while infected — and listen to the Chief Medical Adviser whose advice is to wear a mask.

Daily US COVID Cases

Stocks have paused after the recent run up in Treasury yields. When both stocks and bonds are being sold, there is nowhere to hide.

The Nasdaq 100 is testing support at 12000. At this stage the correction looks mild, with declining Trend Index remaining above zero, but breach of 12000 would signal a test of the Sep 2020 low.

Nasdaq 100

The S&P 500 is performing better but Volatility troughs above 1.0% still warn of elevated risk.

S&P 500 & Twiggs Volatility 21-Day

The big five tech stocks are a mixed bag. Alphabet (GOOGL) and Facebook (FB) show strength. Microsft (MSFT) looks stable, while Mazon (AMZN) and Apple (AAPL) are trending lower.

AAPL, AMZN, GOOGL, FB, MSFT

When leaders no longer lead normally signals the final stage of a bull market. The chart below shows the Russell 2000 small caps ETF (IWM) clearly outperforming the large cap Nasdaq (QQQ) and S&P 500 (IVV) indices with all the tech heavyweights.

IVV, IWM, QQQ

@Schuldensuehner

The steeper yield curve benefits banks, who profit from the wider net interest margin. Major banks have climbed 60% to 80% over the past six months, with Goldman Sachs (GS) leading and Bank of America (BAC) the laggard.

Major Banks

Consumer durables sectors are, again, a mixed bag. Household Goods (HG) is flat, Apparel Retail (RA) is climbing steadily, while Automobiles (AU) is down sharply — mainly because of Tesla (TSLA).

Consumer Durables

Though light vehicle sales were down a million units in February.

Light Vehicle Sales

And heavy truck sales were down 4,000 units compared to January.

Heavy Truck Sales

Prospects for the tire industry are improving. Goodyear (GT) retraced to test its new support level after breaking out above its high from late 2019. Respect would confirm another advance.

Goodyear Tyre Co. (GT)

Conclusion

The recovery is going to be a long hard slog with frequent setbacks. Banks are doing nicely but stocks generally are over-priced and ripe for a major adjustment. There are signs that this is the final stage of the bull market and market risk is elevated.

S&P 500 fueled by the Fed

The S&P 500 continues, unwavering, in a strong up-trend.

S&P 500

But compare the growth in the S&P 500 index relative to growth in the money supply (M2). In relative terms, the S&P 500 appreciated only 29%, or 2.6% p.a., over the past decade. Most of the stellar performance over the past 10 years can be attributed to the Fed’s expansionary monetary policy.

S&P 500/M2 Money Supply

Dollar Index

The Dollar Index continues to test support at 90. A Trend Index peak below zero warns of strong selling pressure. Breach of support is likely and would signal another primary decline.

Dollar Index

The Chinese Yuan, however, has halted in its appreciation against the Dollar. Trend Index peak below the 7-week MA warns of secondary selling pressure. Breach of support at 15.4 US cents would warn of a correction.

CNYUSD

Conclusion

The S&P 500 is likely to continue rising for as long as the Fed expands the money supply. The Dollar, however, is expected to weaken for the same reason.