Most major European markets closed the week with sharp losses as
eurozone economic growth slumped to a four-month low in January
and the latest report from the U.S. Department of Energy showed a
further increase in stockpiles of crude. Indices in Denmark (-6.8%),
Italy (-5.3%), France (-3.8%), Germany (-3.7%), Switzerland (-3.3%),
the U.K. (-2.8%), and Spain (-2.5%) shed more than 2% for the week.
Author: Neeraj Khanna
Global Focus Emerging Long
Mainland Chinese markets were up for the week with the Shenzhen up
3.6% and the Shanghai up approximately 1%. We mentioned last week
markets are currently oversold and extended from 10- and 40-week
moving averages and a pause at these levels would not be surprising. This
week the Shenzhen worked its way back to the 21-day moving average
in the short term, but still remains nearly 15% away from the 10-week
moving average. Despite this short term pause, we continue to have
a bearish outlook with the market having a high probability of
retesting and eventually breaking September lows at 1,574. This
may not happen immediately though, the markets will be closed
next week for the Lunar New Year holiday and over the past several
years has had a history of moving higher soon thereafter.
Global Focus Frontier Long
Economic Summary
GDP growth slows in the last quarter amid Fed rate hike and sluggish global demand.
Economic growth stumbled.
The Q4 GDP rate slowed to 0.7%, lower than the 2.0% growth in Q3, and marginally below the
economists’ consensus estimate of 0.8%. Deceleration in household spending, private
investment, and cut down in the inventory dragged the GDP growth.
US Focus Long
U.S. indices traded sharply higher on Friday, recovering from early week losses to close higher
for a second straight week. Earnings encouragingly provided a strong bump in a select few
U.S. Focus List ideas that led last year. With that said, the internals still remain suspect, with
oil related stocks and mining companies bouncing from extreme lows, and utilities continuing
to lead. We have been advising to rotate into defensive sectors as the market bounces from
oversold levels, and we continue to recommend this approach. For this initial rally off the
lows to be sustainable, we will need to see additional ideas outside defensive and broken down
sectors to re-emerge.
• There could be a tradable rally up and into multiple areas resistance, led by best of breed and
specifically our highest conviction idea – Facebook (
). We are watchful of this potential
rotation into additional growth ideas, though currently, there is just not enough to buy, which
keeps our cautious approach valid. The market followed-through on Friday, but again, there
remains just a handful of leadership ideas.
European Focus Long
Most European markets pared early losses to end the week with gains,
as reaction to the U.S. Federal Reserve’s gloomy economic outlook
was tempered by a rise in commodity prices and a surprise move
by the Bank of Japan to extend its monetary stimulus program by
adopting a negative interest rate policy for the first time. Indices in
Denmark (+2.6%), the U.K. (+2.4%), the Netherlands (+1.9%), France
(1%), and Spain (+0.8%) had modest gains while Germany (-0.1%) and
Sweden (-0.2%) were relatively flat.
Global Focus Developed Long
The Australia ASX All Ordinaries Index gained 1.8% this week,
closing at the top of the weekly range for a second week. It remains in
a Rally Attempt, awaiting a follow-through day, but remains 15% off 52-
week highs and well below 10-week and 40-week moving averages.
Global Focus Emerging Long
Mainland Chinese markets fell for the second straight week with the
Shenzhen leading down over 7% and the Shanghai down over 6%.
The Shenzhen is now trading at the 24-month moving average, a key
long term support level. A break below this support could lead to over
30% total downside potential from current levels. The Shanghai has
already broken long term trends trading approximately 8-9% below
the 24-month moving average with no support until 2,500 suggesting
7-10% more downside from current levels. With the markets extremely
extended from 10- and 40-week moving averages, it would not be
surprising if markets took a pause or bounced at this point with
the potential of a follow-through day occurring in the coming week
before the Chinese New Year holiday. Despite this possibility, we
remain bearish due to the sheer amount of overhead supply and
resistance, which the market must still push through.
Global Focus Frontier Long
US Focus Long
U.S. indices staged an upside reversal this week, rallying from extreme declines intraweek.
These short-term bounces, led by broken down lagging sectors, provide time to lighten up
in later stage growth ideas, and rotate into more defensive stocks. We believe the market
will likely re-test lows within the next few weeks for a number of reasons. Breadth remains
extremely poor and continues to deteriorate as secular growth ideas begin to pull back and
form new basing patterns. Large cap growth ideas that have sold off heavily to begin the
new year combined with short-term bounces from energy, will both run into multiple areas
of resistance due to excessive levels of overhead supply. Though we are now three days off
Wednesday’s bottom and in a new Rally Attempt, any follow-through day that may develop
next week, will unlikely be supported by fundamentally strong leadership due to major
technical damage. The major averages are broken and until we see volatility subside and a new
follow-through supported by fundamentally strong ideas, we will continue to advise a defense
approach.
