Market Radar 06. February 2023


Robust labour market: good for cyclicals, bad for gold
Major U.S. stock indexes fell back on Friday as it was revealed that the economy added 517,000 jobs in January — a figure far above the consensus estimate of 185,000.
The unemployment rate fell to 3.4%. Economists had expected a slight increase to 3.6%.

The Fed wants a slowing labor market to reduce inflation. But do companies also want a declining labour market?

Of course not. A slowing labour market usually leads to a recession. Companies want to decide for themselves whether or not to reduce their workforce – not be forced to do so by a weak economy.

And if companies almost voluntarily dismiss employees in times of a shortage of skilled workers, it is above all in order to be able to score points in terms of cost efficiency in future quarterly reports. “Look, dear analysts: sales have declined, but profit margins have increased.”

Analysts usually reward an increase in profitability ratios in a listed company more than revenue generated in the past quarter.
Increased sales revenues are a thing of the past. Higher profit margins are the stones CEOs can now build on.

As long as a recession is not announced by a weak labor market and negative growth rates and thus there is no reason for the Fed to lower interest rates, stock market participants should enjoy cyclicals.
Growth companies with already established market power do not urgently need lower interest rates now in order to grow and expand. Currently, such growth companies want to become more profitable and accept sales losses and foregoing expansion. Well-known examples that are currently reaching our ears through all media channels: Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL). CEOs’ focus on profitability is typical of any start of a bull market in the stock market.

The fact that the majority of the stock market fell and did not rise according to the labour market data published on Friday at 2:30 p.m. is only a reflex: “Higher interest rates are bad for equities”. Anyone who still believes in this sentence has missed Wednesday evening. After all, after US Federal Reserve Chairman Jerome Powell clearly signaled at the press conference on Wednesday after the interest rate decision that the development of the stock market is no longer the focus of the Fed, who is afraid of interest rate hikes?

But they actually still exist, these scaredy-cats. And this fear is not entirely unjustified. On Friday, we clearly saw who is afraid of interest rate hikes: namely, anyone who bets on an interest-sensitive asset, such as gold. More on that below.

Those who rely on cyclically sensitive assets – such as stocks from cyclical industries such as mechanical engineering, electrical appliances or logistics companies in the transport and warehousing sectors – can now be ticked off the fear of interest rate hikes.

At the latest when interest rates are lowered again (on the grounds that an excessively weakening economy should be supported by the central bank), cyclical equities are likely to come “under the wheels”.
As long as interest rates are not lowered, cyclically sensitive equities are likely to continue to rise.

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What do we see under the radar of the major stock indices?

Crash in a short period of time
A crash in gold – a crash in a short period of time. This is also available on the stock exchange.
In the chart of the ETF for the gold price (GLD), we saw a new 8-month high at the end of the day on Wednesday. It seemed a foregone conclusion that gold and mining stocks from the precious metals sector would move upwards – and a gold price above USD 2000 also seemed within reach.

Last Friday, however, the higher low formed on January 27 was undercut with “Karacho”. Thus, a trend change took place in a short period of 2 days.

Investors should not speculate now on a quick reconquest of the high – certainly not on a gold price above 2000 USD. A longer-lasting consolidation or even correction is now more likely.

By the way, what we saw on Friday in gold, we also see in most charts of stocks from the gold and silver mining sector. Also in the charts of the three gold mining stocks with the highest market capitalization Newmont (NEM), Barrick Gold (GOLD) and Agnico-Eagle Mines (AEM), we saw on Friday that a previously formed higher low in the daily chart with Karacho was undercut.

Bonds technically less battered than gold
The third well-known asset, which is often included in asset calculations of balanced funds alongside equities, is US government bonds. In the ETF for long-dated US government bonds (TLT), we saw a higher high on February 2. Friday’s setback did not have a crash character like gold. The daily closing price on Friday is still above the higher low of 31 January. In the TLT ETF, the upward trend since the beginning of the year is technically intact. However, we now locate a double top around 109 USD in the chart. A multi-week consolidation between 100 and 109 USD would now be a possible scenario (closing price on Friday in the TLT ETF: 106.70 USD).

Oil and uranium stocks under selling pressure
Commodity stocks from the oil and uranium sectors also fell sharply on Friday.

The ETF for uranium (URA) has now corrected for two days in a row, falling below the last higher low on the chart for January 31. In addition, a winning streak over 9 trading days was “shredded” in 2 trading days. In the uranium sector, too, consolidation or even correction is now more likely than a reconquest of old highs. In addition, the trading volume in the URA ETF was so exorbitantly high on the last two trading days that a swing-long maneuver would therefore be discouraged.

However, it should be mentioned that the world’s most highly capitalized uranium stock, Cameco (CCJ), still looks quite healthy compared to the URA ETF. The sharp decline in the price of the URA ETF seems to be largely due to small-capitalized stocks.

Swing Long Maneuver
In fact, the market radar awards entry stamps for Monday: so we definitely see entry opportunities for swing-long maneuvers. These include agriculture (MOO), chemicals (XLB), lithium (LIT), aerospace (ITA) and solar (TAN) sectors.
Leader stocks with which traders could enter swing entries on the long side would be, according to my scans, for example:

Agriculture: FMC Corp. (FMC)
Chemistry: Univar (UNVR)
Lithium: Albemarle (ALB)
Aerospace: TransDigm (TDG)
Solar: SolarEdge (SEDG)
Where to top up now?

Financials (especially regional banks) were relatively unimpressed by the market correction on Friday. Here I see good opportunities for the start of further highs. Possible Leader candidates:
Banks: East West Bancorp (EWBC)
Regional banks: TriCo Bancshares (TCBK)

Cyclically-sensitive sector ETFs such as steel (SLX), industrials (XLI), technologist (XLK) and transport (IYT) were also quite unimpressed by the robust labour market data on Friday. We have already written above why panic about robust labour market data is absolutely out of place here. Possible Leader candidates:

Steel: Commercial Metals (CMC)
Industry: United States Lime & Minerals (USLM)
Technology: SPS Commerce (SPSC)
Transportation: Old Dominion Freight Line (ODFL)