Market Radar 23. November 2022


Are four disruptive fires slowing down the SPY today or not?

Yesterday, the SPY ran into its probably maximum feasible daily goal: 400 points. Shortly before the close of trading, this mark was reached, but then just below with the closing bell: The SPY closed at 399.90 points.

Even if, according to statistics, the Wednesday before Thanksgiving usually brought rising prices in the S&P 500, today we see some warning signs that prove to be disruptive fire in the course of the trading day and thus could not allow unbridled euphoria:

Firstly, there is yesterday’s put call ratio: For example, we were able to see from the put call ratio, as published by the CBOE every half hour, yesterday that it rose sharply from 18:30 German time. At about the same time, the SPY began its rise towards the 400 mark, which could be worked off without resistance. During this period, market participants hedged relatively aggressively with long puts on the S&P 500.

And secondly, there is the VVIX: The volatility of volatility (VVIX) yesterday formed a divergence with both the VIX and the SPY. The VIX fell nearly 5% yesterday, while the VVIX rose nearly 1%. This indicates a need for correction in the S&P 500, at least in the short term.

And thirdly, there is the market analysis by trading volume: On Tuesday, we saw lower trading volume in the S&P 500 with rising stocks than with falling stocks.

And fourthly, there is the FED: At 8 p.m. German time, the FOMC minutes are published in the USA. New interpretations of the Fed’s monetary policy are not to be expected. Anything but a zero event for stock market participants would be a surprise. If the expectation of a zero event is confirmed, market participants could dissolve their previously set up put hedges after 8 p.m.

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What do we see under the radar of major US stock indices:

4 industries with new highs yesterday

After consumer staples, four other sectors yesterday managed to exceed the movement highs from the 46th calendar week upwards: insurance (KIE), utilities (XLU), healthcare (XLV) and cyclical industrial stocks (XLI). The first three industries historically show relative strength mostly in bear market phases. So it fits. The strength of industrial stocks suggests that a recession in the US may be avoided.

Three contract manufacturers under the microscope

Let’s take a closer look at the three contract manufacturers I mentioned yesterday as harbingers that a recession could possibly be avoided.

Sanmina Corp. (SANM) is a global contract manufacturer that sells electronic components and systems to OEMs. Sanmina produces, among other things, printed circuit boards and circuit boards and tests and maintains electronics and precision systems for its customers. A joint venture with Reliance Industries is expected to accelerate growth in India. The P/E ratio is 0.5 and the expected P/E ratio for 2022 is 14. By 2024, the P/E ratio is expected to fall to 11. This seems favorable, especially since the company’s financial situation looks very healthy. The quarterly figures published on November 7 were quite well above estimates. According to CEO Jure Sola, order books should fill up faster than new goods can be sold. After the publication of the quarterly figures, the stock has risen by 11%. Currently, the stock is consolidating in the chart above $65 and should soon target $70 as the next target.

Fabrinet (FN) is also a contract manufacturer of electronic components. Growth rates are higher than Sanmina’s. This may be due to the fact that Fabrinet also provides its customers with a tailor-made software platform with which all aspects of the manufacturing process can be monitored in real time. Currently, Fabrinet is valued significantly higher than Sanmina: For 2022, a P/E ratio of 24 is expected. This is to sing by 2024 on 16. The CCA is 2 and is expected to fall to 16 by 2024. The company had reported strong quarterly results on the same day as Sanmina and the stock has been rising steadily ever since, so far without significant consolidations. 

Jabil (JBL) is much more diversified than its competitors Sanmina and Fabrinet. In addition to contract manufacturing electronic components, Jabil manufactures wearable devices for better customer experiences used on cruise ships and is working on wireless solutions to help customers implement Internet-connected devices. In addition, Jabil offers solutions for improved production of plastics and uses 3D printers for in-house production and also manufactures optimized solutions for them to enable faster printing speeds. Jabil is currently valued at a P/E ratio of 10, which is expected to fall to 8 by 2024. The CCA is only about 0.3. Jabil seems to me to be the most innovative in this trio. At the same time, it seems to be the most favorably rated. Jabil has been in rally mode for 4 days and will probably soon attack the all-time high of December 29, 2021 at $71.73 (closing price yesterday: $70.77).

Country rotation in ex-USA regions

A few weeks ago, Indonesia and Brazil, along with India and Mexico, were considered the countries from the slightly more developed emerging markets that were very popular with institutional investors. But now we see a pretty clear outflow of money: out of Indonesia and out of Brazil. Both countries are now receiving the daily stamp “wait and see or speculate on sell-off” from the market radar.

Which regions of the former USA currently receive the most money? Europe should probably be mentioned first and foremost. The relative strength of the European indices to the American ones can no longer be overlooked

Also astonishing is the development in the ETF for the frontier markets (FM), namely in terms of the trading volume in this ETF. Frontier markets (german: frontier markets) have smaller market capitalization and liquidity than the more developed “traditional” emerging markets. Index provider MSCI currently identifies 29 countries as frontier markets for its MSCI Frontier Index.

These include countries such as Argentina, Bangladesh, Croatia, Ivory Coast, Kenya, Kuwait, Kazakhstan, Senegal, Tunisia and Vietnam. Since November 14, we have seen a daily trading volume in the ETF for frontier markets that is many times higher than before November 14. What happened on November 14? On this day, US President Joe Biden and China’s head of state Xi Jinping met at the G20 summit in Bali. Joe Biden expressed hope at the meeting that a conflict between the US and China could be avoided. The US president is keen to get a grip on differences and prevent competition from turning into conflict. Perhaps this G20 summit will be perceived in later history books as a turning point that the market – as so often – anticipated on November 14: a renaissance of globalized politicians, economists and thus also investors. US stock market participants seem to have begun to invest their money increasingly in regions outside the USA by 14 November at the latest.