Market Radar 30. January 2023


Risk-On Leads to FOMO – But Fear of Recession Comes Back
Both stocks and government bonds were sold in the last hour of trading on Friday. Stock market participants took profits before the weekend.

Volatility heralds a breather

Despite all the risk-on readiness, a short breather could now do the indices good. Since Tuesday, the CBOE VIX of VIX (VVIX) has risen along with the S&P 500. The VVIX has also recently developed in opposite directions to the VIX (CBOE Volatility Index). The VVIX measures the volatility of volatility. A rise in the VVIX while the VIX falls is usually a harbinger of higher volatility. A parallel rise in the VVIX with the S&P 500 usually indicates an imminent consolidation in the stock market in the short term. However, falling prices should then be used for entries or subsequent purchases. Or is it?

Is recession now threatening to put a damper on the situation?
We often read that the good mood on the stock markets does not fit with the population’s fears of recession. Incidentally, these concerns are shared by most CEOs of US companies.
The Federal Reserve Bank of Atlanta has measured a 3.5% increase in gross domestic product in the US for the fourth quarter of 2022. This measurement in the so-called GDP-Now indicator has now been completed and is 0.6 percentage points above the official measurement of the US Bureau of Economic Analysis, which is usually decisive for economists and politicians. This means that 2.9% gross domestic growth is now the official GDP increase for the fourth quarter of 2022 for key decision-makers.
How do fears of recession fit in when the US economy was so “buzzing” in the fourth quarter of 2023?

On Friday, the Federal Reserve Bank of Atlanta announced its first forecast for the first quarter of 2023, the final survey of which is expected around April 28, 2023. As the first forecast for the first quarter of 2023 in the GDP Now indicator, gross domestic growth of 0.7% has now been mentioned. A significant slowdown in the economy is therefore expected for the beginning of 2023. This means that fears of recession are at least taken seriously from the data side and are no longer ignored. This means that many economists and stock market participants are unlikely to see a recession in the USA for the first half of 2023 as unlikely as it was just a few weeks ago. Of course, this could put a strong damper on the risk-on readiness on the stock markets. Why is that?
Is there now a threat of a strong setback for the risk-on actors?

In the past, it can be observed that low points on the stock markets can usually be located in the second half of a recession phase.
A few examples from the past:

During the recession, which officially began in January 1980 and ended in July 1980, the U.S. stock market bottomed out around the beginning of spring in March 1980.
During the recession, which officially began in July 1981 and ended in November 1982, the U.S. stock market bottomed out around October 1982.

During the recession, which officially began in March 2001 and ended in November 2001, the US stock market also bottomed out around October 2001.
During the recession, which officially began in December 2007 and ended in June 2009, the US stock market saw its low again at the beginning of spring in March 2009.

Basically, March and early October seem to be the times for lows in the stock market.
We already saw a low at the beginning of October in 2022.
If a recession phase in the US for more than two months actually materialises, then the lows of early October in the major US stock indices should still be undercut this year.
So it somehow remains the same as before: recession levels do not fit with the current risk-on readiness on the stock market at all.

In case of doubt, I agree with the market and not with the economic data, because a better seismograph than the intermarket analysis for the future price development – and thus parallel to the company’s development – has yet to be found.

As long as the market radar measures risk-on readiness, I assume that a recession in the US can be avoided. Despite the warning from the recent GDP-Now survey. However, the GDP Now indicator should definitely be kept in mind. It will therefore continue to be compared with developments in the equity markets on the market radar.

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

Do gold and wind power now invite you to buy more?
For today, there are entry stamps for gold and silver mines as well as for stocks from the wind power industry.
After a few days of correction in the corresponding ETFs, it could be worthwhile to enter stocks that show a similar pattern as in the ETFs or have recently shown more relative strength than these ETFs.

After two trading days that ended in losses, trend followers in my favorite gold mining stock, Agnico-Eagle Mining (AEM), could now speculate on a continuation of the trend. The stock is even trendier than the corresponding ETF for gold mines (GDX). In addition, we measure a lower trading volume for the last two trading days than in the previous five trading days. At these, the share of Agnico-Eagle Mining was bought at the opening and then closed five times in a row close to the daily high. This is what accumulation looks like.
We see a similar picture at Wheaton Precious Metals (WPM). However, on Tuesday, the stock was among the stocks affected by the flash crash shortly after the start of trading, so the price determination for this day does not correspond to the course of trading.

Wind power
In the field of wind power, there are no companies in the USA that are solely concerned with the construction, operation and sale of wind turbines. One quickly comes across conglomerates in which this division is only one of many business areas from the industry. Probably the best-known company of this kind is probably the Siemens competitor General Electric (GE).

After some research, however, I found what I was looking for in the small cap sector. TPI Composite (TPIC; Market capitalization: $560 million) manufactures and sells ultralight composite wind blades and related precision molding and assembly systems. TPI Composite’s customers are leading manufacturers of wind turbines. The company has not been profitable since 2019. Previously, quite manageable profits could be achieved over a few years. In retrospect, this is not a stock that should have been held as an investor. Analysts currently estimate that the company will not return to profitability until 2025. For 2023, a decline in sales is even expected: In 2022, annual sales amounted to 1.74 billion US dollars. This is expected to shrink to 1.69 billion in 2023 – i.e. around 3%. For 2025, however, sales revenues of 2.33 billion US dollars are expected – an increase of 34% compared to 2022. The current KUV is 0.3. In relatively good financial years, the company was valued at a P/E of around 1.

Since December 28, TPI Composite shares have already gained nearly 60%. Looking at the favorable price-to-sales ratio of 0.3, a tenbagger in the depot is quite possible from the perspective of about 3 years – but the prerequisite is that the company can report an annual profit again in 2025 – which should then also be higher than in the past.

Energy suppliers have been left behind by the risk-on boost
The ETF for energy suppliers (XLU) is currently the only one of 57 observed sector ETFs to receive the daily stamp “wait and see or speculate on sell-off”. However, in the chart of XLU we now locate a rather hidden higher low for January 25th. Such hidden higher lows often mark the beginning of the end of a consolidation. If the major stock indices consolidate for a few days or weeks, the defensive shares of utilities could at least find a little more interest among stock pickers.

Of course, trend followers continue to steer clear of energy suppliers and prefer to look for their opportunities in stocks from the software, Internet sectors or – despite the recent weak quarterly figures from Intel (INTC) or KLA Corporation (KLAC) – in the semiconductor sector or the above-mentioned gold or silver mines.

Ex-U.S. regions
India (INDA) and Pakistan (PGAL) are currently decoupled from the risk-on mode. Both region ETFs lost heavily on Friday and formed new lows.
Indonesia (EIDO), on the other hand, has recently developed well and receives the day stamp “Buy or top-up” for the first time in a long time.