Mr. Tetsu Emori[May 19, 2020] U.S. stocks rise on vaccine expectations

Publication date: 2020/05/19 08:26

【US Stock Trading Strategy】
US stocks are sharply higher. Just the news that early-stage trials for a COVID-19 vaccine candidate have succeeded is enough to push prices up this much, illustrating how the current market remains bound by the coronavirus. Vaccine development is welcome, but as experts point out, the risk of a second wave of infections is a concern. If lifting stay-at-home measures leads to rising infections in Europe and the Americas as in China and Korea, it is necessary to keep in mind that concerns could spread again.

Nevertheless, the equity market itself has begun to recover. The Dow Jones Industrial Average has reached a high in the rebound. If it breaks above this level, it could move higher again. In that case, it could rise to around $26,250. The S&P 500 is eyeing around 3,000 points. Surpassing the psychological threshold of 3,000 could rapidly clear the previous uncertainty. Also, the Nasdaq index has already broken through an important rebound level, with momentum to return toward its all-time highs. Having surpassed the rebound high, a continuation of gains today could push it higher still.

Thus, US equities are moving toward an exceptionally high rebound. Whether the market has priced in all impacts from the coronavirus is undoubtedly a major focus right now. The view that the economic impact and corporate earnings will be priced in or remain minor underpins the current rally. However, many experts believe it will take years for the economy to return to pre-COVID levels. Since expert opinions are often wrong, the current rapid recovery in stock prices seems to be too fast.

As noted previously, at some point there will be a realization of the underlying deterioration. If Q2 GDP suffers a large drop and Q3 sees a dramatic rebound already priced in, the realization of the deterioration could come around October. In any case, at some point such a phase seems likely. Until then, the market may continue to buy on hopes for the future. You must decide whether to follow this movement or wait for a correction.

Bank of America (BofA) data released on the 15th show that through the week to the 13th, investors increased holdings of cash and corporate bonds while reducing exposure to equities. This likely reflects caution about a second wave of the coronavirus and concerns about the global economy. Money market funds attracted $35.6 billion, with inflows since the start of the year totaling $1.2 trillion. Corporate bonds saw inflows of $1.58 billion. By contrast, stock funds saw outflows of $0.62 billion, and emerging market funds saw outflows of $0.56 billion. EMs have experienced outflows for 13 straight weeks.

Looking at these investment money flows, stock prices are rising even as funds are flowing out of the equity market. This mirrors the pre-COVID environment. However, back then buybacks were likely supporting prices, whereas buybacks now are thought to be significantly reduced. Therefore, it is important to recognize that stocks are rising despite net fund outflows—a rather curious situation.

From a calendar perspective, the 21st to 22nd are viewed as important. This year’s price action resembles 1980 and 2001, when around this date trends clearly changed. In 1980, prices shifted strongly upward; in 2001, they fell sharply. The rebound from March’s low to now is very similar, and the upcoming price action will be closely watched. While the economic backdrop differs from those years, I think a mid-term downturn following the 2001-type decline is natural.

For short-term trading, there are long signals for the Nasdaq index and the FANG index. It could be prudent to follow these moves. It is important to mechanically ride what is rising. If prices turn lower, entering the market with the assumption that declines will be erased may be appropriate. The VIX has fallen below 30 and is relatively stable. If this rebound continues, opportunities for profit may be missed, so consider trading even small positions.

For long-term portfolio strategy, the approach remains the same: accumulate on large declines. It is uncertain whether prices will decline again. However, given how far they have recovered, a new downturn could be sizable once it starts. I am keeping funds reserved to buy 30%, 35%, 40%, 45%, and 50% declines from February highs. Additionally, to manage risk, I am considering declines of 55% and 60%, planning to buy in seven tranches overall. For long-term portfolio cash, there is no need to deploy unless a decline occurs. Holding cash and staying prepared to participate is essential.

For long-term investing, it is important to buy physical assets via ETFs and similar vehicles. Physical holdings can withstand declines, and they are not used as collateral for futures or CFDs, avoiding double risk. Prices may still fall 20–30%, but I intend to continue buying. As this is a long-term investment, I assume at most a further 20% decline and will allocate funds accordingly. With physical investments, you can endure price drops.

Ultimately, prices will recover. For long-term investing, the bottom often occurs when you sell after giving up during declines. It seems peculiar, but that is how it often works. A multi-year perspective is increasingly necessary now.

Generally, a position in the S&P 500 alone should be sufficient. Diversifying across assets leads to more stable management. The VIX can serve as a hedge, enabling broader strategies. The combination of the S&P 500 and VIX is very important.

＜US Equity Market Short-Term Trading Strategy＞
Dow Jones:
S&P 500:
Nasdaq Composite: New long
Nasdaq-100: New long
FANG Index: New long
Russell 2000:
VIX:

【US Bond Trading Strategy】
US 10-year Treasury futures: long positions closed, selling. This signals that investors’ risk-off posture has weakened. High-yield bonds are being sidelined but remain of interest as risk assets. Observing this movement helps gauge investors’ risk tolerance.

In the long-term portfolio strategy, always hold US Treasuries. Hold about 20% to 25% in US Treasuries.

＜Bond Market Short-Term Trading Strategy＞
US 10-year Treasuries futures: close long positions by selling
US High-Yield Bonds:

【Major Equity Index Trading Strategy】
FTSE, DAX, Hang Seng Index, NIFTY, Bovespa Index, and Russian equities—use the strategies below as reference. Diversifying across several stock indices can help portfolio performance as gains from other assets support overall results. Use this to gauge global market trends. If you have ample funds, consider including these as trading targets.

＜Major Stock Markets Short-Term Trading Strategy＞
FTSE:
DAX:
Euro Stoxx:
Shanghai Composite Index:
Hang Seng Index:
H-shares:
NIFTY:
Bovespa Index:
Russian stocks: New long

【Japan Equity & Bond Market Commentary & Analysis】
Nikkei Stock Average: 20,133.73 (+96.26) < +0.48% >
TOPIX: 1,459.29 (+5.52) < +0.38% >TOPIX: 1,459.29 (+5.52) < +0.38% >
Mothers Index: 872.56 (+33.03) < +3.93% >Mothers Index: 872.56 (+33.03) < +3.93% >
Nikkei VI: 30.67 (-1.46) < -4.54% >Nikkei VI: 30.67 (-1.46) < -4.54% >

Japan 2-year JGB yield: -0.181% (+0.014)Japan 2-year JGB yield: -0.181% (+0.014)
Japan 10-year JGB yield: -0.013% (-0.009)Japan 10-year JGB yield: -0.013% (-0.009)

Japanese stocks were aided by the rise in US stock index futures. 58% of issues rose, 39% fell. Volume was 1.21082 billion shares; turnover was 2.037 trillion yen. The Nikkei Stock Average dropped into negative territory but then reversed. Market participants view the gradual uptrend since early April as continuing. Gains in US stocks and oil prices last week, along with steadier currency markets, supported investor sentiment. After-hours US stock index futures also rose, strengthening buying confidence. However, the Nikkei Average rose more than 150 yen from last week’s close and then paused. With intensifying US-China tensions over electronics components, semiconductor-related stocks did not rally aggressively. Domestically, while economic activity is hoped to resume, negatives such as the bankruptcy of fashion retailer Renown and worsening macro conditions are becoming evident.Japanese stocks were aided by the rise in US stock index futures. 58% of issues rose, 39% fell. Volume was 1.21082 billion shares; turnover was 2.037 trillion yen. The Nikkei Stock Average fell into negative territory but then rebounded. Market participants view the gradual uptrend since early April as continuing. Gains in US stocks and crude oil prices last week, and exchange rate stability, supported investor sentiment. The early-week after-hours US stock futures extended gains, boosting buying confidence. However, the Nikkei Average rose more than 150 yen from last week’s close and then topped out. With concerns about intensified US–China tensions over electronic components, semiconductor-related shares did not rise aggressively. Domestically, while expectations of economic activity restarting remain, negative factors such as the bankruptcy of fashion retailer Renown and worsening macro conditions are becoming evident.

SoftBank Group (SBG) reported on the 18th for the fiscal year ended March 2020 a net loss of 961.5 billion yen (vs a profit of 1.411 trillion yen the previous year). Market turmoil from the COVID-19 outbreak led to enormous losses in the investment business led by Son Masayoshi. If only for the 2020 fiscal year’s first three months (Jan–Mar), the loss rose to 1.4381 trillion yen. The annual loss was the largest since the company’s founding in 1981 and the biggest for a Japanese company on a quarterly basis, surpassing TEPCO’s loss of 1.3872 trillion yen in Jan–Mar 2011 after the Great East Japan Earthquake.SoftBank Group (SBG) announced on the 18th its consolidated results for the year ended March 2020, showing a net loss of 961.5 billion yen (vs a 1.411 trillion yen profit the previous year). Market turmoil from the COVID-19 outbreak led to enormous losses in the investment business led by Son Masayoshi. For the 2020 year’s first three months (Jan–Mar), net loss reached 1.4381 trillion yen. The annual loss was the largest since 2005 and the largest since the company’s founding in 1981. Quarterly results surpassed TEPCO’s 1.3872 trillion yen loss in Jan–Mar 2011, marking the largest ever for a Japanese company.

Financial support to WeWork, a US operator of shared offices, and losses related to Uber Technologies weighed on results. As the valuation of the held shares was lowered, impairment of about 1.9 trillion yen swelled for the SoftBank Vision Fund (SVF), which manages about 10 trillion yen. At a press conference on the 18th, Son warned that further impairment in investment activities cannot be ruled out. He also referenced that about 15 of SVF’s 88 portfolio companies could go bankrupt due to the corona crisis. SBG plans to raise 4.5 trillion yen through asset sales within a year to fund share buybacks and debt reduction.Financial support to WeWork and losses tied to Uber Technologies weighed on results. With the lowering of the fair value of holdings, impairment of about 1.9 trillion yen swelled for the SoftBank Vision Fund (SVF), which manages about 10 trillion yen. At a press conference on the 18th, Son warned that further impairment in investment activities could occur. He also noted that about 15 SVF portfolio companies could go bankrupt due to the corona crisis. SBG plans to raise 4.5 trillion yen from asset sales within a year to fund share buybacks and debt reduction.

For the year ending March 2020, net sales in continuing operations rose 1.5% year on year to 6.185 trillion yen. Operating loss was 1.3646 trillion yen. The 2021 earnings forecast was not disclosed. Dividend policy remained undetermined, with potential for no dividend. Also, by leveraging Alibaba Group holdings, they planned to raise 11.5 billion dollars. They reportedly entered into multiple forward contracts with financial institutions. The plan allows for stock-based settlements between January 2022 and April 2024. As part of selling assets to fund buybacks and debt repayment, they plan to dispose up to 4.5 trillion yen of assets within a year.For the year ended March 2020, revenue from continuing operations rose 1.5% year over year to 6.185 trillion yen. The operating loss from core business was 1.3646 trillion yen. The 2021 earnings forecast was not disclosed. The dividend policy remains undecided, with a possibility of no dividend. They also planned to use Alibaba Group holdings to raise $11.5 billion. They reportedly entered into multiple forward contracts with financial institutions. The terms allow settlement in stock for settlements from January 2022 through April 2024. As part of funding buybacks and debt repayment, they plan to sell up to 4.5 trillion yen of assets within a year.

Additionally, Alibaba founder Jack Ma announced he would resign as a director of SBG effective June 25. Furthermore, as part of the March policy on buybacks and asset sales, SBG announced a buyback of 135 million shares (6.70% of issued shares) up to 5 trillion yen, with the acquisition period from the 18th to March 31, 2021. The company had already announced on March 23 a plan to buy back 2 trillion yen and sell 4.5 trillion yen of assets, which is part of this plan.Jack Ma, founder of Alibaba, also announced his resignation as a director of SBG effective June 25. In addition, as part of the March plan for buybacks and asset sales, SBG announced a buyback of 135 million shares (6.70% of issued shares) up to 5,000 billion yen, with acquisition period from the 18th to March 31, 2021. The company had already announced a plan on March 23 to buy back 2 trillion yen and sell 4.5 trillion yen of assets, which forms part of this initiative.

For the January–March 2020 period, real GDP contracted by 0.9% quarter-on-quarter, annualized -3.4%. The recovery in consumption from the January–February consumption tax hike was wiped out by COVID-19’s wide-ranging impact from March, with private consumption and investment deteriorating. Although the decline in Q1 was modest, a sharp drop in Q2 is expected due to the spread of infections in the following quarters. After last year’s Q4 decline of 7.3% annualized from the consumption tax increase, growth would fall further by around the 3% range, leading to a technical recession. Two consecutive quarters of negative growth had not occurred since 2015 (Q3–Q4).The real GDP for January–March 2020 contracted by 0.9% quarter-on-quarter, annualized -3.4%. The recovery in consumption following the January–February tax increase was wiped out by the broad-ranging impact of COVID-19 from March, with private demand such as consumption and investment deteriorating. The drop in Q1 was limited, but Q2–Q4 are expected to see a deeper decline due to the infection’s impact. After last year’s Oct–Dec drop of 7.3% annualized from the tax hike, growth fell further into the 3% negative range, entering a technical recession. Two consecutive quarters of negative growth have not occurred since 2015 (Q3–Q4).

Domestically, private consumption had been recovering from the tax increase up to January–February, but March’s stay-at-home measures hit travel and dining, resulting in a -0.7% quarter-on-quarter drop for two consecutive quarters. Private capital expenditure also fell -0.5% quarterly, remaining weak after the -4.8% drop in Oct–Dec last year. Construction investment and machinery investment related to expansion also showed postponement. Housing investment dropped 4.5%, the largest decline since Jul–Sep 2014. Public investment fell 0.4%, the first decline in five quarters.Domestic demand contributed -0.7%, keeping two straight quarters of negative growth; external demand also weighed, contributing -0.2% for the two quarters. Exports fell sharply by -6.0% QoQ, the second consecutive drop since 2011, with global weakness and a decline in inbound tourism. Imports also deteriorated by -4.9% QoQ due to weak domestic demand, making the negative external contribution larger than exports.

Domestic demand contributed -0.7%, two consecutive quarters of negative; external demand dragged on overall, contributing -0.2% for two quarters. Exports fell 6.0% quarter-on-quarter, marking the second consecutive quarterly decline, the largest since Apr–Jun 2011. Global economy contracted, auto exports were weak, and inbound consumption deteriorated significantly. Imports also fell 4.9% quarter-on-quarter due to weak domestic demand, a second consecutive deterioration. Because export declines were larger, external demand contributed negatively.

【Japan Stock Trading Strategy】【Japan Stock Trading Strategy】
Nikkei Stock Average: 20,133.73 (+96.26) < +0.48% >Nikkei Stock Average Futures recovered to around 20,500 yen on the Chicago market, buoyed by US stock gains. Since Japanese stocks track US stock price movements, today too we should monitor US stock index futures. As the US market trend strengthens, we will watch how far Japanese stocks can follow. As noted, the P/E ratio has climbed into the 30x range, but this is no longer reliable. Since EPS continues to fall daily, if prices do not move, the P/E will rise accordingly. Even above 30x, it cannot be deemed overvalued.

Regarding P/E published by Nihon Keizai Shimbun, for companies unable to provide earnings forecasts, EPS is calculated as zero regardless of profitability, leading to distorted results. Therefore it is even less reliable. It is better to focus on the more conventional P/B (BPS). BPS remains in the upper 20,000s but dipped today. If it continues to fall, caution is warranted. Today’s BPS is 20,544 yen, and depending on price movements today, P/B could exceed 1. It remains to be seen whether this signals a full rebound.

From May 13 to June 25, Venus retrograde has begun, but so far there have been no major moves. In fact, stability has strengthened. If this continues, it does not appear a correction is imminent. Additionally, Mercury retrograde runs from June 18 to July 12, and movement may have to wait until then. In any case, market energy needs to build before the next move; watching for shifts in major foreign futures positions, some buyback activity is needed before a meaningful correction may occur.

SoftBank Group’s earnings are so large they’re hard to process. Regardless, it’s clear that the company is taking extraordinary risks in their business. The earnings can swing dramatically with the stock price, which is a concern. Investors who like the company and Son Masayoshi will remain shareholders regardless of the price movement, so this stock should be treated as a distinct kind of asset and followed. Nevertheless, because it is included in the Nikkei, we cannot ignore it and will continue to monitor it. Yet, even with such enormous losses, the stock market remains interesting in that it does not sell off completely. In ADR terms, it rose 1.2% relative to yesterday’s close in Tokyo. I will continue to monitor intraday moves today as well.

In the short-term trading strategy, there are long signals for the Mothers index. Also, depending on today’s gains, long signals may appear for Nikkei futures and TOPIX futures. However, I would not want to buy at this level; I will decide whether to buy based on today’s intraday movements and technical indicators. I hold positions in the Nikkei Double Inverse (1357) and the Nikkei VI (2035) to prepare for a future decline.

The long-term portfolio strategy remains unchanged. I hold the Nikkei Leverage (1570), but the position is quite small. Going forward, I will only add on large declines. If prices fall 30%, 35%, 40%, 45%, and 50% from February highs, I will add to the position. I will buy in at least five installments. Additionally, to withstand declines of 55% and 60%, I will allocate funds in splits. Using a high-price reference of around 24,000 yen, I have prepared to buy at levels like 16,800, 15,600, 14,400, 13,200, 12,000, and even 10,800 and 9,600 yen. From a BPS perspective, such declines are hard to imagine, but BPS could fall as well. Always keep the worst-case scenario in mind.

In stock investing you cannot buy the ultimate bottom, so for long-term investing the priority is to divide funds enough to gradually accumulate. Investing in ETFs and other physical products allows you to withstand declines. Only investors who can buy at the lows can ultimately grow their assets through stock investing. Then, consider adding trading to generate cash, and allocate that cash to long-term investing.

Technical indicators show the 25-day moving average of the advance/decline ratio at 118% in an overheated zone, while the 6-day average has fallen to 102%. The PER has risen to 36.61x, which is losing significance. EPS has plunged to 549 yen. PBR is 0.98x, BPS is 20,544 yen. A PBR around 1x may occur today. In any case, I will keep an eye on BPS movements. The short-selling ratio is 41.0% with no notable changes. The number of new highs is 43 and new lows 7, maintaining a bullish pattern. The Nikkei VI fell to 30.67. The dollar-denominated Nikkei Average rose to 187.88 dollars. The NT ratio rose modestly to 13.80x. The Nikkei Average rose 0.48% and TOPIX rose 0.38%, reflecting the performance gap. With the NT ratio surpassing 13.80x, the Nikkei's overvaluation is becoming evident.

As of May 1, margin debt (the margin debt ratio) rose slightly to 2.47x. Short positions decreased and long positions increased slightly. The margin valuation loss rate as of May 1 fell to 22.49%, though it remains above 20%, indicating that investor positions are still damaged. As of May 8, foreign investors were net sellers by 120.649 billion yen, while individual investors were net buyers by 17.052 billion yen. Individuals sold 10.628 billion yen of cash and bought 6.425 billion yen of margin. Foreigners showed no April net buying and ended May still in a selling stance, while trust banks bought 9.181 billion yen, marking the 10th straight week of net buying.

＜Japan Stock Short-Term Trading Strategy＞
Nikkei Stock Average:
TOPIX:
Mothers Index: New long
Nikkei VI:

Nikkei Leverage (1570):
Nikkei Double Inverse (1357):
TOPIX Leverage (1367):
TOPIX Double Inverse (1368):
Mothers ETF (2516): New long

NYSE Double Bull (2040):
NYSE Double Bear (2041):
ISHARES S&P500 (1655)
NASDAQ (1545): New long

Nikkei VI (2035):
VIX Short-Term Futures (1552):