Novum Digital Asset Alpha – Daily Analysis 29 May 2020

Happy Friday! 

Going into the weekend, already skittish markets are down again on the back of increased U.S.-China tensions, tempering optimism as all 50 states in the U.S. gradually reopen for business.  

Asian stocks slid along with European and U.S. stock futures as markets took a cautious turn before U.S. President Donald Trump’s anticipated address later today, that many investors fear could stoke further tensions between Washington and Beijing.  

U.S. stocks had been rising with the Dow Jones Industrial Average up by over 200 points prior to Trump’s comments on Thursday afternoon that he would hold a press conference to announce a response to China’s push for tighter security controls on Hong Kong.  

The risk of heightened tensions has weighed down markets, with stocks in Asia down in the morning trading session.  

Tokyo’s Nikkei 225 (-0.28%), Hong Kong’s Hang Seng (-0.35%), Sydney’s ASX 200 (-0.98%) and Seoul’s KOSPI (-0.11%) were all down, with Australia’s benchmark indices shedding the most, on fears of diminished commodity demand from China in the event of an outbreak of a trade war with the U.S.  The S&P 500 (-0.21%) and Dow Jones Industrial Average (-0.58%) closed down yesterday and the Russell 2000 Index (-2.48%), a measure of small businesses in the U.S. fell for the fist time in over a week.  

Crude oil dipped as well with WTI Crude Oil (Nymex) (-1.25%) trading at US$33.29, on doubts over demand for oil and petroleum products with heightened trade tensions between the U.S. and China and a looming supply gut.  Gold (+0.23%) rose with Comex Gold at US$1,732.20 and the Japanese yen rose as well as investors sought safe havens.  

Yields on the benchmark 10-year U.S. Treasuries fell to 0.63% from 0.67% the day before, signalling strengthening demand for safe assets – yields typically fall as bond prices rise. Bitcoin (+3.47%) staged a late rally last night to test US$9,600, before retracing to currently trade now around US$9,500, fueling the narrative that Bitcoin is a digital safe haven asset.  

TGIF!  

If you’re feeling thirsty this Friday evening and can’t get out to a bar because of lockdowns, try mixing this delicious summer-inspired cocktail of cherries and refreshing lime.  Happy Friday and Happy Hour wherever you are! 


China & U.S. Tensions – Who Will Blink First?

To understand Beijing’s actions in Hong Kong is to catch a glimpse into the psyche of the political machinery that runs the Middle Kingdom.

The goal of the Chinese Communist Party, which has oft been repeated, is the unity of the entire Chinese nation, not just geographically, but ideologically as well.

And while China’s rapid economic rise had fueled hopes that China would eventually more closely resemble Hong Kong, yesterday Beijing dashed such hopes and made clear its intention to make Hong Kong much more like the rest of China.

On Thursday, China forged ahead with a resolution to impose national security laws on Hong Kong, in a bid to crush anti-Beijing protests in the autonomous city.

The move came a day after the U.S. House of Representatives passed a bill to sanction Chinese officials involved in the suppression of Muslim minority groups and the U.S. State Department determined that Hong Kong no longer has a high degree of autonomy from China – a precursor to the Trump administration revoking Hong Kong’s special arrangements with the U.S. on trade.

And while this may come as a surprise to some, outside of Bruce Lee movies, Hong Kong exports very little to the U.S.

In fact, Hong Kong is a net importer and is one of the few territories that the U.S. enjoys a trade surplus with.

And that has helped to keep markets, particularly in Hong Kong, from nosediving.

Hong Kong’s Hang Seng Index shed only 0.7%, on a day when most other markets were up.

Investors are betting that regardless of rhetoric, the Trump administration is unlikely to revoke Hong Kong’s special trade status.

But the threat of increasing geopolitical tensions between the U.S. and China did create some winners, on a day when the S&P 500 and the Dow Jones Industrial Average were down.

Lockheed Martin (+0.33%), maker of key defense equipment such as the F-35 stealth fighter, rose as much as 1.74% at one stage before being dragged down by broader market sentiment to end the day up slightly.

Boeing (+0.20%) also bucked the broader market trend, as it started its first round of involuntary layoffs this week and on the back of the resilience of its defense, space and security divisions.

Raytheon Technologies (+0.93%) also performed well yesterday, rising almost 1% as investors bet on increased demand for sophisticated missiles and fire control systems against a backdrop of increasing geopolitical tensions.

As we had noted last week, defense stocks will continue to be on our radar as we expect them to continue doing well, especially as tensions continue to flare up between the U.S. and China on a wide range of issues, including Hong Kong, Taiwan, the South China Sea and trade.

While it is unlikely that a single shot will be fired in anger, it’s always nice to know that you’re close to a gun should you need one.

Cheap Is Good, Cheap Works

Last week we spoke about the resilience of companies such as Walmart (+0.99%) and Dollar Tree (+11.55%) in light of shifting spending patterns.

On a day when American indices were down, Walmart and Dollar Tree continued to demonstrate their attractiveness to investors.

As more Americans buckle down their spending, we expected that discount retailers, specifically Dollar Tree would do well.

This week, Dollar Tree did not disappoint.

Stock in the discount retailer soared almost 12% in a single day, after posting stronger-than-expected earnings for the first quarter and smashing analyst estimates, with a surge in demand for affordable essential goods as homebound customers hunkered down during the pandemic.

And with new data revealing that over 2.1 million American workers filed jobless claims last week, a number that has been steadily decreasing, there is a view in some quarters that the worst may be over.

With restaurant, hotel and airline bookings all rising in the United States, there is growing optimism that the U.S. economy is moving forward.

That should play up nicely for another retailer which we identified will continue to do well – Target (+0.87%).

Target is what we term an “aspirational upper middle class” retailer – it’s sufficiently hip but with good prices, so that those who’ve seen their incomes take a hit won’t be embarrassed to shop there, plus it’s got a great online shopping experience and curbside pickup.

Retailers that are more likely to suffer are those which were already struggling well before the pandemic – including Abercrombie & Fitch (-11.11%) and Gap (-9.27%) which had struggled to keep up with fashion trends and shorten their supply chains.

Are We In The Midst Of A Bubble?

It’s often said that the market typically tanks when the last bear becomes a bull.

The bumper run in American stocks is beginning to turn its doubters into believers, adding fresh thrust to a rally that has wrongfooted veteran investors, lured in retail traders and defied all logical economic outlooks caused by the global pandemic.

The S&P 500, an index constituting American blue chip companies that represent a broad cross section of the American economy is up over 30% from its low just two months ago – in any other context, that sounds like the trajectory of Bitcoin’s price movement.

On Wednesday, the S&P 500 closed above 3,000 points for the first time since early March and the rally has built a legion of skeptics who worry that the market is driven entirely by Federal Reserve stimulus and that bullish investors are too confident a coronavirus vaccine will emerge to rekindle corporate profits.

But now, even those naysayers have become buyers because of something that the cryptocurrency markets are all too familiar with – FOMO – or the Fear Of Missing Out.

Speaking with the Financial Times, co-chief investment strategist for John Hancock Investment Management in Boston, Emily Roland likened the recent buying by new believers to crossing a busy highway,

“They are looking for an opening, they know it’s possible to get hurt, but they are just going for it.”

An investment philosophy more akin to “spray and pray,” then a precision airstrike.

But investors have to ride the horse in the direction that it’s already going in.

Which means don’t fight the markets and look out for buying opportunities as they make themselves available with a keen eye on risk.

We’d pass on cyclical stocks and small caps which have enjoyed bumper gains over the past week, particularly in those sectors which are most economically sensitive, including travel, airlines, restaurants and hotels.

Critics have also warned that retail investors, lacking the hard-nosed analysis of Wall Street professionals or the strict discipline of quantitative traders, are fueling this latest rally – potentially bidding up stocks to dangerous levels.

Users of Robinhood, a zero fee stock trading app popular among Millennials has seen positions in companies in the Russell 3000 index of the biggest U.S.-listed groups double since the rally began, according to calculations by Morgan Stanley.

And of the ten most popular stocks held by Robinhood users, American Airlines (-8.35%) and cruise operator Carnival (-7.60%) were among them – two companies most badly hit by the coronavirus and whose fortunes may not turn for some time.

But investors waiting for a cataclysmic collapse of stocks may have to wait a little longer.

U.S. policymakers have indicated that they are ready to expand already record amounts of fiscal and monetary support.

And as long as the U.S. continues opening up with no second wave of infections, as unlikely as it should be, stocks will continue to climb.

Bitcoin Roars Ahead

Yesterday we noted that just as how Bitcoin tested US$8,700 and found that it did not like that level at all, nor did it like US$9,900 either, it has now bounced off the lower level of support and was drifting northwards towards the upper boundaries within the Bitcoin Goldilocks zone.

Last night saw a positive run up for Bitcoin, pushing the benchmark cryptocurrency to test US$9,600 with only the slightest pullback to trade at US$9,500 currently.

We noted yesterday that since Bitcoin was hovering just below US$9,200, with some evidence of consolidation at that level, there were indications that it would make another push towards US$9,300 in the immediate term and another rush for US$9,500 in the mid term – that analysis turned out to be spot on.

We suggested that those looking to go long on Bitcoin could consider entering at US$9,160 and taking profit at US$9,300 and a more speculative exit at US$9,500, but set a stop loss at US$9,080 – a trade that was highly profitable.

The short trade we suggested however was stopped out. Yesterday we suggested that those looking to short Bitcoin, consider setting up the short to enter at US$9,200 and short all the way down to US$8,880, with a short cover at US$9,300.

We did warn yesterday that while the short trade would make more money, it was more risky and the long trade would make less money but was the odds on favorite.

Looking forward to the next 24 hours, Bitcoin’s ability to clear US$9,300 with nothing more than a “Bye Felicia” suggests an interim support at US$9,300 and a stronger support at US$9,100.

There is some broad resistance at US$9,500 which is stifling an outright run towards US$9,700, but markets are positive.

Those looking to go long on Bitcoin can consider entering closer to US$9,500 and taking profit at US$9,700 and US$9,800, with a stop loss at US$9,400 to be safe.

If you’re looking to short Bitcoin, wait till it tests US$9,600 again, despite that not being the real level of resistance and short all the way back down to US$9,100, with a short cover at US$9,700.

Technical measures indicate that in the interim at least, Bitcoin should enjoy continued strength to US$9,700.

Bitcoin’s has regrouped to form a bullish pennant. (Source: Novum Digital Asset Alpha charting tools.)

Ethereum Everywhere!

Yesterday Ethereum had a brilliant run similar to Bitcoin and has formed a bullish pennant as well, having managed to convincingly clear the resistance at US$206, it also cleared US$210 and now trades at US$221.

We noted yesterday that because Ethereum had so many shots on goal, Ethereum’s US$207 level of resistance was weak, but it needed Bitcoin to clear US$9,300 to see Ethereum race towards US$210 again.

And because Bitcoin did clear US$9,300 without any fanfare, Ethereum raced through US$210 and tested US$225 at one stage before pulling back to now trade around US$221.

The trade was suggested yesterday for those looking to long Ethereum, was to consider setting up an entry close to US$206 and setting profit targets at US$208 and US$210 with a stop loss at US$205 – a trade that was profitable.

We suggested that those looking to short Ethereum could consider waiting till it rushed for US$208 again and short all the way down to US$204 and US$202, with a short cover at US$210 – this trade would have been stopped out.

Now that Ethereum has consolidated above US$220, expect that US$225 to be one level of resistance while US$230 is a much stronger level of resistance.

Bitcoin will need to test US$9,900 for Ethreum to break the resistance at US$230, while it has a strong support at US$218 and US$213.

Those looking to go long Ethereum can consider timing an entry closer to US$221 and taking profit closer to US$225, with a stop loss at US$219 and some speculative money to take profit at US$230 and US$235.

Shorting Ethereum is slightly more tricky, but consider waiting for another push to US$225 and taking profit at US$217 with a short cover at US$230.

Ethereum is consolidating again at US$220 which signals another move higher.

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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