Blockchain Bonanza
Hi everyone, this week there have been interesting insights into an asset class that is hot right now and there has finally been some breathing room for the equity markets. One major FTSE company has been caught bending the rules to get ahead, while some technological advancements are happening in one of the largest financial markets in the world. Enjoy!
Commodities on the come up
So far this year, commodity tied investment instruments have had a net cash inflow of $38.7bn according to data from Citi. Over the last three months, commodity prices have soared due to pandemic-based supply chain disruptions as well as the Russia – Ukraine conflict.
Now institutional investors are pumping money into the area as a hedge against the worryingly high inflation rates that are hitting their real rate of return. Global commodities such as precious metals and agricultural crops have performed well since the start of the pandemic but have only started to gain real attention in 2022, with the S&P500 GSCI showing a YTD increase of 41.3%. With inflation still rising in many parts of the world, it is likely that more and more investors – institutional and retail - will get into the commodity scene.
S&P 500 GSCI, Source: S&P Global
Wall Street bounces back
The S&P 500 this week ended its 7-week losing streak, the longest it has suffered in 21 years. This week economic data was released showing that the US economy is performing poorly as a result of heightened inflation. This has given investors a boost in confidence, as they believe the poor economic performance could lead to the Federal Reserve taking a more dovish approach to the tightening of monetary policy. This means that borrowing costs will not rise as severely and business performance will not be affected as negatively.
Glencore caught red-handed
Anglo-Swiss commodity trading and mining company Glencore has been dealt with fines of $1.5bn as investigations into bribery in the company from the UK, Brazilian, and US authorities were concluded this week. Glencore Energy UK has been charged with 7 cases of bribery connected to oil operations throughout Africa in countries such as Cameroon and the Ivory Coast. In the US, the company’s trading arm pleaded guilty to two separate criminal cases, one involving bribery and the other for manipulation of US Oil price benchmarks. Glencore’s share price has remained relatively unaffected, rocketing almost 36% in 2022 due to the energy crisis. White-collar crime at its finest.
Source: US Bureau of Labour Statistics
Blockchain Bonanza
French banking group BNP Paribas has joined JPMorgan in the use of digital tokens in short-term fixed-income trading. This is done through a blockchain network that the US banking giant has set up. This development is significant in the movement to modernise the $12tn fixed income market.
The blockchain allows participants to lend out US Government bonds in the form of digital tokens for a few hours as collateral, without having any impact on the company’s balance sheet. The main benefit of this platform is the speed at which the deals can be performed as well as allowing short-term lending without breaking legal safety buffers of the number of liquid assets that must be held by investment banks (Post Subprime mortgage crisis).
JP Morgan has gained first-mover advantages on this operation. It will be interesting to see if it becomes the industry standard for other investment banks to sign up to their platform or whether competitors will try to branch out and create their own blockchain structure. We’ve come a long way from the picture below, that’s for sure!
Hope you enjoyed this week’s Market Wrap!
Patrick
Technical Analysis + Value Stocks = Great Returns
More tailored and thoroughly thought-out stock selection is becoming increasingly prevalent as we traverse through an equity bear market and approach recession territory. In today’s article, I will discuss my rationale behind going long a stock within a rather mundane industry. This could produce exciting returns and prove to you that technical analysis can be a fantastic supplement to fundamental equity research and picking profitable trades.
Value vs Growth in 2022
Earlier in the year, many investors predicted that cyclical (value) stocks would outperform growth stocks. This is because value stocks have historically performed well in inflationary and policy tightening environments which is expected to persist through 2022. The chart below showing the ratio between the S&P500 Value index (compilation of undervalued companies in S&P500) and the NASDAQ 100 (which is heavily weighted by big tech/growth companies) shows this narrative is playing out perfectly, with value outperforming growth by 25.5% YTD.
S&P500 Value index (VOOV) / NASDAQ showing ratio between value and growth stocks for 2022
Industry selection - Steel
Bearing this consensus in mind, at the beginning of 2022, I went in search of a value-oriented industry that could outperform in an inflationary environment. At the same time, I was also screening for equities on which I would base my research report and stock pitch for my university’s student managed fund, where I was an analyst in the Materials sector. Luckily for me, the Materials sector is full of value companies with huge potential in inflationary conditions such as those in metals and mining. An industry where I saw great potential for a value swing trade was the steel industry due to growing demand for steel and supply chain constraints providing a bullish case for steel prices in the coming months.
An ETF (Exchange Traded Funds) is a financial instrument that can be used to look at the technical picture for individual industries. For analysing the steel industry, I used the VanEck Steel ETF as shown in the price chart below. At the beginning of the year, it showed great potential for a breakout of a bull flag consolidation region within the purple trend lines as downward momentum showed multiple signs of slowing with a reversal looming. Price failed to break the 51.50 support level after 3 attempts and began a strong upward shift towards the upper trend line in late January.
VanEck Steel ETF successful break out of bull flag consolidation
Moving Average Convergence Divergence (MACD)
When looking at medium-long term trends to capitalise on, it can be very useful to gauge whether the direction of momentum for the stock price is changing. The MACD is an incredibly powerful indicator for this specific purpose. A momentum shift can be pinpointed if the MACD line (26-period exponential moving average (EMA) minus the 12-period EMA) crosses over with the signal line (9-period EMA of the MACD line.
MACD – one of the most powerful momentum indicators
The MACD on the VanEck ETF chart shows a crossover of these lines in the first week of February and the first green candle in months. I found this to be a strong bullish confirmation for the steel industry which went in hand with the strong fundamental argument for steel prices at the time.
Stock selection - Steel Dynamics, a quintessential value stock
Of course, alongside analysis of the steel industry, I was busy shortlisting steel stocks that would produce the best risk-reward for the trade. I like to use screeners such as Finviz to help out with this so that I can find companies with the most attractive metrics such as Price to Earnings or Debt to Equity, as these would be the companies that investors are likely to favour. Steel Dynamics, the younger brother of the US steel industry leader Nucor appealed to me as the top pick for the trade with the chart showing excellent upside potential if it broke out of the bull flag. And so it did, with the MACD also producing a crossover on the same week of the break out providing the bullish confirmation for the trade to go ahead.
Technical chart set up for medium term swing trade on STLD
Upon entry in early February, STLD immediately started to produce returns off the back of the Fed maintaining rates at near-zero levels in January and the CPI numbers coming in hot once again, benefitting value stocks. The Invasion of Ukraine and the commodity boom led to even further gains.
My first take-profit price is the previous high of the bull flag at $74. However, beyond this, determining price targets becomes tricky as the price has entered the all-time high territory, therefore no previous support or resistance levels exist. The only technical target here is from the bull flag target by projecting the length of the flagpole from the initial upward trend (black dotted line) onto the upper trend line.
Bull flag technical break out – don’t fully trust everything it tells you
Gambling your entire trade on price reaching a target such as the bull flag break, however, is totally irrational. You can possibly use Fibonacci levels which I may talk about in a later article. For this trade, trimming the position in incremental steps of $2-$5 is my best option, and I aim to close the position at the psychological level of $100. I have placed a stop loss at my entry price, and will closely monitor macroeconomic developments in case I need to close the trade early. The strong retest and resumption of the $74 support level is likely another great take-profit opportunity.
For those interested, you can find my equity research report on Steel Dynamics (STLD) covering everything from valuation to ESG on my LinkedIn page.
That’s all for this week, hope you enjoyed it!
Ronan
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.