What is the future of the American stock exchange? Technical analysis

Looking at major indexes it can be seen that investors do not doubt the dynamic recovery of the global economy. And although they are afraid of inflation, they are convinced of its rebound and a significant improvement in the financial results of many enterprises. The situation was analyzed by TMS analysts in the report "Technical analysis of the American stock exchange".

The interest rate on US 10-year treasury bonds has tripled since August last year. this is a trend that caused anxiety in the markets and triggered a sharp correction in the stock markets at the end of February.

- On Monday, March 1, the Wall Street session ended with the strongest gains in major indices in almost nine months, but it doesn't mean anything anymore. The rebound, as impressive as it was, was fragile and news from China shook the confidence of investors. On Wednesday, the US 10-year interest rate has fallen back to 1,40%, and the USD is weakening again against risky currencies. We do not count on a complete halt of the yield curve, but this phenomenon should block the risk rally less and less, comments Konrad Białas, chief economist of TMS Brokers.

- Currently, it is a matter of believing that there are grounds for rebounding risky assets and - perhaps more importantly - getting rid of the fear that there is no threat of another wave of sell-off - adds Białas.

According to the economist, the Fed wanted to dissuade investors from speculating that higher yields do not mean an earlier normalization of monetary policy.

- Although the verbal intervention of the Fed does not immediately mean a reversal in the trends in government bond yields and their growth is likely to be sustained (based on the improvement in the recovery outlook), it should disrupt the reflation trends among risky assets less and less. Peace of mind has returned to the stock market - it sums up.

How do exchanges react to data?

It is also worth noting other data, good for the US economy. Higher than expected reading of the ISM index for the manufacturing sector in the US gives hope for the stock market bulls to sustain growth, and on the other hand confirms the economic rebound, and thus may strengthen inflation expectations. In February, the ISM index of the industrial sector in the US amounted to 60,8 points. The consensus of forecasts assumed an increase in the index to 58,9%.

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The data also shows an increase in US retail sales. Economic recovery supported by consumption is likely to put pressure on price increases.

- Better retail sales results will improve the earnings outlook for Wall Street companies. We also know from the boss's recent statements Federal Reserve Jerome Powell that even a persistent inflation above the bank's target will not affect the earlier normalization of the monetary policy in the US - explains Łukasz Zembik, head of the analysis department at TMS Brokers, in a new report "Technical analysis of the American stock exchange".

- Until there is a permanent improvement in the labor market and consumption, the Fed will not change its ultra-loose monetary policy, which is good news for risky assets, including American equities - adds Zembik in a new report "Technical analysis of the American stock exchange", in which he points out that investors' attention may focus, among others the consumer stamples sector, i.e. the sector of everyday use items.

- The non-cyclical values ​​of this sector can generate profits even during an economic slowdown or recession. They can be classified as defensive actions that pay dividends - explains Zembik in the report and adds that it is worth paying attention to, for example, Costco Wholesale, whose "two previous adjustments - at the end of 2019 and spring 2020 - were similar in terms of spread, and the scenario a third correction of a similar magnitude is most likely. '

Company valuations

It cannot be denied that the valuations of many companies are highly overstated. Most of the NYSE stocks are above their 200-session averages. High valuations do not immediately mean that we cannot be higher on the stock exchange.

- On many stocks, a natural technical correction is simply more likely at this point, which will cool down the heated minds of investors and allow you to re-enter the market at better, i.e. lower levels. In terms of sectors, there is no evidence of capital flowing heavily from growth companies (win-winners) to value stocks, although this trend began in November last year. Therefore, in the near future it is still these companies (mainly technology) that should lead the way on the stock exchange - assesses Zembik in the report "Technical analysis of the American stock exchange".

You have to remember that most of these companies publish great results. This does not mean, however, that value companies are in a losing position. The rebound in the valuation of these companies' shares was relatively smaller, so there is room for catching up. Referring to market analogies (we are talking about the period 2008-2010), it can be seen that the second year after the crisis is usually also increasing, although the dynamics of rebound is usually much slower.

- The stock market deserves a moment of breath. After it, we should again observe the advantage of the demand side - assesses Zembik.

The entire report is free to download here.

Source: TMS Brokers press material