ASX 200 to fall, US stocks reverse gains, yield curve hits steepest inversion since early 1980s

MARKETS

• S&P 500 reverses a 0.9% rally in early trade to close at session lows
• Peak rate expectations have jumped to 5.2% compared to 4.8% a week ago
• Market now closest to neutral positioning since Q2-22 after cutting US$300bn of bearish bets (Bloomberg)
• Traders starting to place bets Fed will hike up to 6% (Bloomberg)
• 2-and-10 year yield curve hits deepest inversion level since the early 1980s (Bloomberg)

STOCKS

• JPMorgan cut hundreds of mortgage employees due to lower industry volumes (Bloomberg)
• Toshiba receives US$15bn buyout proposal from private equity group Japan Industrial Partners (FT)

EARNINGS

• Hilton Worldwide (+2.3%): Beat both earnings and revenue expectations.
• “Our fourth quarter and full year results surpassed our expectations, with fourth quarter system-wide RevPAR meaningfully exceeding the same period in 2019 driven by growth across all segments …Positive momentum has continued into the new year …” - CEO Christopher J. Nassetta
• Walt Disney (-1.3%): Better-than-expected EPS and revenue, recent price hikes for Disney+ resulted in a loss of around 2.4 million subscribers (but analysts were more than 3 million) and announced plans to cut thousands of jobs as part of a $5.5bn cost cutting initiative.
• Credit Suisse (-15.6%): Posted its worst annual loss since the 2008 global financial crisis (-US$1.4bn), fixed-income trading revenue fell -84% as peers recorded double digit gains, equities trading revenue fell -96% and clients pulled approximately $120bn.
• Affirm (-17.1%): Earnings and revenue missed analyst estimates, active merchants fell to 243,000 from 245,000 in the previous quarter and plans to layoff ~19% of its staff (approximately 500).

ECONOMY

• German inflation hits five month low of 9.2% (FT)
• China car sales collapse 38% in January as subsidies end (Reuters)
• Economists shift to "no landing" scenario where growth holds up (NY Times)
• Sweden's Riksbank hikes by 50 bps, signals more to come (Reuters)
• President Biden sees no recession in 2023 or 2024 (Reuters)
• Jarden suggests Australia house prices may plunge 15% in 2023 (Bloomberg)

QUICK BITES

EPS peaks: "We are at a cyclical inflection point: The market tends to be ahead of the earnings cycle, often by several quarters. That’s why, in an early-cycle bull market, we tend to see valuations expand while earnings are still contracting. This happened in 2009 and again in 2020." - Jurrien Timmer, Head of Global Macro at Fidelity.

Rates top earnings yield: The upper bound of the Fed's target rate (4.75%) is close to topping the Russell 1000 Index's current earnings yield (4.97%) for the first time since 2000.

Deeper Dive

Charts of the Week

For anyone who missed the first Charts of the Week instalment last week, each Friday I will be looking at the XJO and three interesting/topical stock charts. I will be looking at them through the technical analysis lens that I like to employ, which includes a host of factors I discuss below. These are not meant as recommendations, more for education and entertainment. Any discussion of past performance is for illustrative purposes only, and past performance is not a reliable indicator of future return.

ASX 200: Bulls baulk at all-time high

I noted last week that the bulls were stalling just shy of the 7600 level and the all-time high. It’s hardly a surprise. It’s a major technical and psychological level and I maintain that the bulls will need a catalyst (strong local earnings season, more signs of inflation coming off) in order to get over the hump.

Whilst it’s easy to forget, the bars and squiggly lines on charts represent the will of the people, and right now people are reluctant to keep bidding up prices. They’d rather ‘wait and see’ after what has been a nosebleed rally from the October lows. That’s right, just four and a bit months ago we were trading 1100 points lower. We’ve seen a circa 18% rally from the bottom. No wonder people are a little gun-shy up at these levels.

As for what’s going on technically, the uptrend is still intact, although volumes have rolled over and the RSI has officially printed a sell signal. It’s certainly not goodnight Irene, but the bearish evidence is starting to mount. Earnings season is the key. Strap in.

Three interesting charts

Auckland International Airport (ASX: AIA)

When scanning through the list of stocks that meet my criteria, AIA stood out for a couple of reasons. One is because of the beautiful uptrend support line, which I have highlighted. The second is because I conducted an interview with a fund manager, Iain Fulton of Nikko Asset Management, earlier in the week and he identified travel as a segment with increasing demand, and limited supply. (Interviews with Iain will be published in the next few weeks on Livewire). 

Those factors generally bode well for participants. Throw into the mix China reopening, increased tourism, and in AIA’s case, a stranglehold on an entire market, and you’ve got the makings of potential share price outperformance. It seems the market is already onto this, but that doesn’t mean that the momentum can’t continue. For fun, make sure to check out the charts of Qantas (ASX: QAN) and Webjet (ASX: WEB) as well… there might be legs in this travel trade!

South32 (ASX: S32)

Forgive my doodling on the chart, but there are some interesting observations to work through. First, the sideways congestion zone that held prices captive for the best part of six months, between $3.50 and $4.50. It would have been great for range traders (seriously, who trades ranges?), but no good for trend traders.

At the start of this year the price action broke higher, but has since traded in an ever-tighter range, forming a pennant pattern. Pennants are continuation patterns. In other words, in theory prices should break in the direction from which they came… prices were moving higher on the way in, so they should break higher on the way out. The only piece of evidence that weakens that theory is the falling volumes.

Either way, it appears as though S32 is shaping up for a sharp break out of the pennant pattern. Such a break could provide opportunities for active traders.

Healius (ASX: HLS)

Something a little different this week. I am a trend trader and I like to buy trend alignment and momentum. There are, however, some people that like to buy stocks that are extreme oversold. These are typically high-risk, high-reward trades. You might have a success ratio of one-in-ten, but if the reward to risk is 20:1, then you’d take the trader every time.

The key is being able to suffer through the nine losses to get the one big winner. Most retail traders and, in fact, most human beings, simply won’t tolerate that much ‘losing’.

All that said, HLS is shaping up as extreme oversold. The share price has been hammered over the past year, volumes have spiked sharply during the most recent selloff, and the RSI is approaching 20. Could it be that all the selling is exhausted, creating a vacuum into which some bargain hunters can step? Again, it’s high-risk, high-reward type stuff, but an interesting setup nonetheless.

That’s it for this edition of charts of the week. If you would like to provide feedback or request stocks for me to run the ruler over, please comment below. Catch you next week. 

Today's Morning Wrap was written by Chris Conway.