Novum Digital Asset Alpha – Daily Analysis 24 June 2020 (10-Minute Read)

I hope you’re having a wonderful Wednesday and a marvelous midweek! 

In brief (TL:DR)

  • U.S. stocks are up as U.S. President Donald Trump refutes allegations that the Sino-American trade deal is “over.”
  • Asian stocks were mixed at the open with Seoul reporting a second wave of coronavirus cases and cases are topping 9.1 million globally with new flare-ups in the U.S. sunbelt and Germany, dampening the stock rally.  
  • U.S. 10-year Treasury Bills slid with yields edging up to 0.708% from 0.704% on Monday (yields rise when bond prices fall).  
  • Crude oil fell with WTI Crude Oil (Nymex)  (-0.72%) trading at US$40.08 over consumption concerns.  
  • Gold (Comex) (+0.24%) soars to US$1,786.20, its highest level since 2012.
  • Bitcoin tests US$9,700 in overnight trading before retracing back to US$9,645 (0300 GMT).

In today’s issue…

  • I don’t know which stocks to buy, should I just buy an index and are all indices built the same?  

U.S. stocks had a choppy trading session yesterday, with the S&P 500 (+0.43%) rising as much as 1.2% at one stage, before paring back gains on reports that coronavirus hotspots in America’s South and Southwest are threatening to derail plans to re-open the country. 

But the tech-heavy Nasdaq Composite (+0.78%) beat all expectations and closed at an all-time high of 12,077.75 points, with investors zooming in on companies that will best weather the coronavirus pandemic. 

Overall, investors bet on continued economic growth and a belief that any setback will be met with increased government spending and moves by the U.S. Federal Reserve to shore up markets. 

Asian market response was mixed in the morning trading session, with Tokyo’s Nikkei 225 (+0.09%), and Seoul’s KOSPI (+1.57%) up, while Hong Kong’s Hang Seng Index (-0.04%) was down on worries over an impending national security law and Sydney’s ASX 200 (-0.01%) was more or less unchanged. 

Winding into Wednesday, tech stocks are by and large galloping away from the rest of the broader market, but is this tech-driven rally sustainable or dotcom bubble 2.0? 

Tech Takes Off & Tears Up Indices

Like cannonball into the pool displaces water, tech stocks are nudging out other companies, resulting in their outsize influence on major stock indices like the Nasdaq Composite and the S&P 500. 

The divergence in performance in major U.S. stock indices is at their widest in almost 17 years, with a surge in big tech stocks helping the Nasdaq Composite to a rally of 13% this year, while the blue-chip Dow Jones Industrial Average (-0.50%) is down 8.3%, and the benchmark S&P 500 is hovering in between, and down 3.1% for the year. 

This index-divergence is significant because it represents the massive influence of tech stocks, not just on indices, but on the economy as a whole, with a handful of growth stocks tilting the balance – including Apple (+2.13%), Microsoft (+0.67%), Amazon (+1.86%), Google (Alphabet) (+0.86%) and Facebook (+1.26%). 

Combined, these tech giants make up a staggering 40% of the Nasdaq Composite and 20% of the S&P 500 and of the the group of companies, only Apple and Microsoft are represented on the blue-chip Dow Jones Industrial Average. 

But the disparity between the winners and the losers, especially against the backdrop of the coronavirus pandemic, has made traditional tools for valuing stocks seemingly redundant. 

While tech stocks have come into their own, other traditional sectors like construction, airlines, hotels, restaurants and energy have all languished, with many of these companies now staring down double-digit losses in their stock prices. 

And whereas much of the economy ground to a halt because of the coronavirus, stay-at-home orders helped accelerate ongoing digital trends which saw increased demand for essential services such as virtualization from companies like VMware (+0.83%), cloud computing from the likes of Amazon Web Services, Microsoft’s Azure Cloud and Google Cloud, which has increased the concentration risk of buyers of indices. 

While returns for tech stocks have been good, investors looking to diversify may find it challenging to do so simply by buying the index moving forward. 

Although tech stocks are similarly weighted on the S&P 500 and the Dow Jones Industrial Average, at 27% and 26% respectively, not all tech stocks are built equal. 

To put things in perspective, consider that two Dow Jones Industrial Average components – Cisco Systems (+0.69%), which was already struggling with customer spending going into the pandemic, and Intel (-0.28%), which has faced stiff competition from chip-making rival AMD (-1.41%), as well as various manufacturing issues, have still not retraced their dotcom era highs. 

Cisco Systems is down 5.2% for the year and Intel is up a paltry 0.1%. 

But the Dow Jones Industrial Average’s underperformance is well documented and for an index that was started in 1896, tracking 12 of the largest stocks in each sector as a means for investors to have a quick overview of the stock market’s performance, is increasingly no longer reflective of that performance. 

But because the Dow Jones Industrial Average (DJIA) doesn’t include companies such as the likes of Amazon or Google (Alphabet), it will continue to underperform. 

And it’s unlikely this will change any time soon either. 

Because the DJIA is calculated by adding the prices of the 30 stocks and dividing by a factor that accounts for changes like stock splits, the high share prices of Amazon and Google (Alphabet) shares would skew the index because companies with a higher share price hold greater sway, regardless of market value. 

Yet those concerns also work the other way as well. 

Especially considering that the fall in the shares of aircraft maker Boeing, whose shares have gone into free fall with the grounding of the 737 MAX airliner and the coronavirus pandemic, almost all but wiped out the gains contributed to the DJIA by the likes of Apple, Microsoft, Home Depot (+0.46%), Visa (+1.54%), UnitedHealth Group (+1.68%), Walmart (-0.50%) and Nike (+2.42%). 

Given that the DJIA only adjusts its constituent stocks every 2 years on average, and the rapidly changing economic environment, the blue-chip index is starting to look a little long in the tooth. 

At a time when tech stocks are being viewed as a defensive area for investors, we’d give the DJIA a miss if you’re looking to buy an index. 

The S&P 500 and the Nasdaq Composite in contrast are weighted by market capitalization and so larger companies have far greater influence on the index than smaller ones – and rightfully so. 

This presents an excellent opportunity for investors to take part in both the tech story growth, as well as for laggards on the index to catch up when the rest of economy finally catches up. 

So for investors looking to broad exposure to a cross-section of the American economy, with a slight lean towards tech, go for the S&P 500 and if you’re looking for an all-in punt on tech without necessarily picking stock, go for the Nasdaq Composite. 

Bitcoin Surges Higher to US$9,600

Bitcoin continues to chug along rangebound as anticipated, with neither bulls nor bears taking command of the narrative. 

Bitcoin rode higher in overnight trading to make a run at US$9,700 but the level was never cleared and is currently trading within a tighter range of US$9,635 to US$9,670. 

Yesterday we noted that Bitcoin could be expected to go through a period of consolidation at the current level of US$9,640 for awhile at least, with no significant moves either up or down and that has played out so far. 

The long trade for Bitcoin we posted yesterday was to consider entering at US$9,640 and getting out when Bitcoin tests US$9,720 again, with a stop loss at US$9,600 – this trade was unfortunately stopped out. 

Bitcoin couldn’t break out of the trading range nor clear the resistance at US$9,680 convincingly. 

Whereas the short for Bitcoin we suggested yesterday, to wait for another test of US$9,720 and short all the way down to US$9,600 with a short cover at US$9,740 never materialized.

Looking ahead to the next 24 hours, expect Bitcoin to continue consolidating at the current level on the back of diminished volumes – that means that any price movement will be sudden and dramatic. 

For now at least, it looks like Bitcoin is poised to move up higher. 

A long trade for Bitcoin could consider entering at around US$9,650 and taking profit at the upper end of the band at US$9,720 with a stop loss at US$9,600. 

Shorts for Bitcoin can consider waiting again till US$9,720 is tested and short to US$9,560, with a short cover at US$9,750. 

Bitcoin could make another push towards US$9,700 and if this level clears, expect another push towards US$9,900. 

Ethereum’s bullish pennant shows there’s some way to go. (Source: Novum Alpha internal charting tools.)

Ethereum Running Up

Unlike Bitcoin, Ethereum has had a stellar 24 hours, pushing higher and consolidating between US$242 and US$245 before pushing through the resistance at US$246. 

For now at least (0630 GMT), Ethereum appears to be able to hold above US$247, suggesting that a push towards US$250 is tantalizingly within grasp. 

Yesterday we noted that the short term outlook for Ethereum was bullish and the digital asset consolidating at the US$242 level (23 June 2020, 0330 GMT), portended for a push higher. 

As we noted yesterday, Ethereum having tested US$246 and retraced, could expect another shot at goal relatively soon – Ethereum did not fail to disappoint and currently trades at US$247.70 (0630 GMT). 

The long trade for Ethereum we suggested yesterday was to enter at US$242 and sell at US$245 with a stop loss at US$241 – this trade was in the money. 

The short for Ethereum we suggested yesterday was to wait till it tested US$245 again and short to US$241 with a short cover at US$246 – this trade was also in the money. 

Ethereum looks to be turning bullish at the moment, meaning that the long trade is more likely to be profitable than the short one. 

Nonetheless, shorts can consider that Ethereum may be overbought and enter at US$248 and short to US$240 with a short cover at US$249. 

Longs for Ethereum will be looking to see Ethereum shoot for US$250 and overshoot. Get in at the current level of US$247.80 and exit at US$252, with a stop loss at US$246. 

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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