Anxieties re-emerge ahead of the US election while earnings look encouraging
US market mood darkens as fears of uncertainties grow
The previous week’s subdued stock market proved to be the calm before the storm as the mood has soured once again with US tech stocks being particularly hit post their earnings results as investors sold them on mostly better numbers, dragging most other sectors down with them. Nasdaq which had double-topped at 12K level earlier this month fell back to its crucial 100-day moving average where it had bounced back from in late September. Industrial names which had briefly out-performed the market in the previous week on what looked to be rotational buying also came off with Dow briefly touching down on its more crucial 200-day line support.
In the meantime, the VIX fear gauge which had been moving sideways since its early September surge has spiked to its four-month highs. More intriguingly, longer term US treasury bond yields spiked up once again close to the previous week’s peak, leaving October with the biggest monthly gains this year and sending mixed but worrying signals of what the market is potentially thinking. Are we seeing the start of another asset price dislocations which we briefly witnessed in March when all assets classes were sold off? Looking at cash parked in US money market funds which had started to balloon back in March and peaked at its record highs in May, assets remain on a gradual downturn for now, showing no immediate signs of dislocation fears.
Otherwise, the US presidential race seems to have suddenly tightened with some pundits now predicting that Mr Trump will yet again prove the polls wrong with his silent majority support base to clinch his re-election. Fears of a contentiously close result and potential for civil unrest have once again elevated market anxieties while surging Covid infections in the West continue unabated with renewed lockdowns in Europe not helping matters. With such wild swings in sentiment, it has become very difficult to read the market short term or identify any major trends.
Better corporate earnings keep us hopeful in Japan
To be sure, the sell-off in the US stocks has also negatively impacted our own market in Japan with technology stocks and cyclicals alike coming under selling pressure. Although corporate earnings are being mostly revised up as we have been anticipating, the ensuing share price moves up are proving short-lived as investors have been selling into the good news.
Indeed, Topix broke below its 1600 support level of the past 3 months, breaching below its 100-day moving average line for the first time since May. The Topix Mothers index which is representative of smaller cap growth names in Japan which at one point this month had risen by 150% from its March lows and matched its Jan 2018 highs has also fallen back by nearly 14% since mid-October led by frothy names which investors have been chasing as stay-at-home beneficiaries.
We have retained our negative stance towards tech names since early August with many of our short sell picks coming from this seemingly overbought and over-loved sector. However, we have also retained our positive stance towards other cyclical names.Although our approach is mainly bottom-up and we are never too pre-occupied with growth vs value arguments and market factors, we are clearly seeing earnings rebound among much more attractively valued and bombed out cyclical stocks which have fallen into value category. This is mainly thanks to notably better end-demand emerging from China, improving domestic consumption and generally better demand conditions within the autos and capital goods sectors, two very important market segments in Japan.
