Market Radar 06. March 2023


Wednesday still roaring bear, Friday puffing bull

U.S. stock markets showed astonishing strength on the buy side on Friday. We also observed a significant decrease in implied volatility.

The put-to-call ratio measured by the Chicago Board Option Exchange (CBOE) fell below 0.60 at the opening of trading. This fell below a threshold, which in times of high risk appetite suggests a possible short-term reversal, i.e. falling prices. As you know, the opposite has happened.

Since retail investor sentiment was rather bearish according to the survey results published by the American Association of Individual Investors (AAII), which were reported pre-market on Thursday, we may have left an exaggeration on the sell side with the opening on Thursday. The bears would have been well advised to switch to the bull camp on Thursday at the opening.

The massively bought call options at the start of trading on Friday now lead to the conclusion that those private investors who had hesitated on Thursday to take off the bearskin were already equipped with bull horns at the opening on Friday.

There are supposed to be stock market participants who regard fickleness as a form of courage and not as a form of procrastination. Those who are in the camp of the brave would be ready to change direction at any time. Perhaps we saw this form of courage on Friday at the opening of trading: Wednesday still roaring bear, Friday puffing bull. Anyone who can trade so daringly without bending himself should have experienced a quite successful trading week.

New safety nets in the S&P 500 and Nasdaq 100

If you are now in the bull camp, you should make sure that the lows of Thursday in the S&P 500 (SPY) and the Nasdaq 100 (QQQ) are no longer undercut. In the SPY, the new safety net is $392.33, in the QQQ at $288.37.

Russell 2000 from now on with a little more momentum?

The Russell 2000 (IWM) presents itself a bit differently. There we saw no undercutting of the last intermediate low at the opening of trading on Thursday. Thursday’s low could now turn out to be a higher low. Thus, the Russell 2000 should develop more momentum upwards than the S&P 500 and the Nasdaq 100 in the next few trading days.

According to risk-on/risk-off logic, this is likely to fuel investors’ risk appetite a bit.

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

We are still seeing higher lows in only a few sector ETFs.
Shipping and Baltic Dry Index decouple

We are currently locating higher lows in the shipping (BOAT) sector. This ETF has decoupled from all the other sector ETFs I observe. Since the end of January, we have seen continuously rising stock prices in this ETF, in which Wall Street-listed companies are underweight. Incidentally, this is also the case in the Baltic Dry Index (BDRY), which tracks freight rates in shipping. However, this ETF did not rally until mid-February, somewhat delayed.

Are plant manufacturers and oil producers developing into a new “dream team”?

On the other hand, we see higher lows in the ETF for industrial equities (XLI). Also in ETFs that track stocks from the oil and gas business. It looks as if oil and gas stocks want to thread more and more into the development of stocks from the old economy such as building materials, steel, mechanical engineering: If construction activity in plant engineering is booming, then the consumption of fossil energy will also increase. This new correlation between energy and plant engineering does not seem to be so far-fetched. For the time being, both sectors could now form a “dream team” and pull the chemical sector along.

Let’s take a look at two stocks from the industrial and oil sectors. Both stocks could soon hit their all-time highs.
An industrial stock from Omaha

For the industrial sector, I noticed Valmont Industries (VMI) while scanning. With a market capitalization of about 7 billion US dollars, the company, which is based in the Warren Buffett city of Omaha, is a small cap. The company is a beneficiary of Joe Biden’s infrastructure package. But it also benefits from technological development in the agricultural sector. Valmont Industries supplies concrete, steel and metal products to companies and government agencies. It also provides solutions for lighting and irrigation systems as well as for the expansion of power grids.

On February 22, Valmont Industries reported quarterly figures that were in line with expectations. On earnings day, the stock lost about 6.5% and fell below the $300 mark on the chart for that trading day. But the next day, the 300 US dollar mark was recaptured. Since then, the stock has risen sharply. On Friday, even a lower intermediate high of mid-February could be exceeded. Daily closing price on Friday: 333.49 US dollars.

With Friday’s closing price, Valmont Industries shares were able to leave the upward downward trend formed since the beginning of December 2022. The stock is trading just 5% below its all-time high of $352.78. It is probably only a matter of time before this is achieved.

An oil stock from Midland, Texas

For oil, I noticed Midland, Texas-based Diamondback Energy (FANG). With a market capitalization of $26 billion, it would be mid-cap. In addition to its main business, which is the extraction of oil and natural gas, it also operates industrial facilities in the form of collection pipelines and water systems.

Technically, the stock is in a sideways range, which has been developing between 130 and 150 US dollars since the end of November 2022. If the breakout succeeds above 150 US dollars (Friday close: 146.76 US dollars), then the all-time high, which the Diamondback Energy share reached in mid-November at 163.26 US dollars, should be started quickly.