Market Radar 24. January 2023


The higher lows must now hold

The ETF for the S&P 500 closed over $400 on Monday. Pre-IPO, we are quoted a bit below.
This trading week, many US companies will publish quarterly figures, so the reaction of the stock market to the results is likely to decide whether the 400 mark can be left upwards or whether this resistance continues to prove to be a stubborn opponent for the bulls.

Decreasing volatility ahead?

The CBOE Volatity Index (VIX) has been hovering around the 20 mark for 4 trading days. The VIX is not directly tradable, but is mainly used as an indicator of fear in the market. Since February 2022, the 20 mark has established itself as the lower limit on the VIX chart. From this mark, the S&P 500 has mostly started to move downwards for almost a year now.

I can certainly imagine that this time it will be different. Should the VIX fall below 19, it could indicate that market volatility will ease over the next few months. The 20 mark could then establish itself as the upper limit – as was the “normal state” from February 2016 until the corona pandemic in January 2020. The 20 mark as the upper limit is also more of the normal state of affairs in the long term of the VIX than what we have seen since February 2022 until today.

And the less fear in the market, the less we will see lower lows in stocks.
Currently, the 55 ex-US country and region ETFs I observe daily are clearly dominated by higher lows (80% of the time). We also see this in the major stock indices from the USA. In most ETFs, these higher lows can be dated to last Thursday. This is really striking, what a market breadth must be attributed to this higher low of Thursday.

Thus, the stop-loss thresholds are now clearly defined.
For the three major US stock indices, these are 387.26 in the SPY (S&P 500). In QQQ (Nasdaq 100) at 273.89. In the IWM (Russell 2000) at 180.78.

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

Risk-On Readiness Grows
Our sector analysis clearly shows that risk-on readiness is increasing. Yesterday, solar stocks were also able to make up for the rebound we missed on Friday. We now see a relatively large number of 5-day highs in technology stocks – especially semiconductor stocks are starting to “rock” and break out of sideways movements upwards.

Focus on furniture and vintage products

However, the industry with the highest price gains on Monday was e-commerce. Here we saw a short squeeze at the online furniture retailer Wayfair (W; Short float above 30%). Wayfair was able to shoot up by 26.80% on Friday. The company has announced job cuts, which prompted the short sellers to massively buy back shares.

One of my personal favorites from the e-commerce sector is Etsy (market capitalization: 17 billion US dollars).
This online marketplace is increasingly selling handmade products – so there are many unique pieces on the platform. In addition, vintage products and everything that has to do with handicrafts, painting and decorating are sold. But cosmetic products and toys are also available for sale online. Through acquisitions, Etsy is now also entrepreneurially active in the fashion sector. Women in particular like to shop at Etsy.

Well-known value investor Bill Nygren bought in in Q3 when stocks hovered between $120 and $95. Currently, Etsy is available for just under 140 US dollars.

The value investor Bill Nygren is known for the fact that, in addition to the valuation, he is primarily interested in the business development of a company, rather than the share price development. As a value investor, he also buys shares with high P/E ratios, because in the end the expected development in the company is decisive for him. 

Noteworthy is the still high short float in the ETSY share, which is stated at FinViz with just under 10%. This repeatedly shows that short sellers do not shy away from stocks whose business model like Etsy is likely to remain successful in the long term – because customer loyalty seems high – as it must be with niche providers at Etsy in order to survive in the shark tank e-commerce.