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Education Series: Single-Stock ETPs

S&P 500: Weekly Lows and a Churn

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

During the weeks ending the 10th and 17th of June, both the S&P 500 and the Nasdaq-100 closed around 5% down week-on-week. With respect to the S&P 500, this has happened only 7 times since World War II ended and none of those were particularly good times.

As of the week ending on the 17th, nearly every single sector’s 50-Day Moving Average Spread (as a %) was trending often in excess of 10%.

While every sector’s price was downtrending on a Y-o-Y basis, energy, utilities, consumer staples and health care sectors were particularly oversold. These sectors particularly attract investor interest in inflationary/recessionary times but investor interest has grown outsized, with little remedy apparent to ease the pressure.

After the mainstay of the U.S. economy shifted from wide-base manufacturing and ancillary services to “tech” in the nineties, the latter had enjoyed substantial investor attention over the past couple of decades or thereabouts. As a result, both commentary and coverage of the “tech” sector had leaned heavily on growth potential for investors, particularly as more and more retail investors trooped into the marketplace.

“Tech” is a significant part of the S&P 500 (with it gaining even more prominence in the Nasdaq-100). However, as a whole, over a year till the week of the 17th, the Trailing Twelve-Month PE Ratios of the S&P 500 (which calculated as a proportion of each stock’s individual PE Ratio) has reached historic lows.

Now, over the past week, reports have emerged that the number of mortgage applications in the U.S. (a key indicator of “societal” health in terms of spending) has been falling. Despite the Fed Rate hike (as covered in the previous article on oil ) being rather modest so far, this is an additional cause for concern.

However, over the past week, there was a substantial jump in both benchmarks: 6.4% in the S&P 500 and 7.5% in the Nasdaq-100. Given the higher representation of “high-conviction” tech stocks in the latter, this is natural. After all, investors have been leaning on “tech” for over a decade now. However, there’s a fair-to-strong likelihood that this broad market recovery might not be sustained. Almost the entirety of the week-on-week rise was attributable to Friday’s big rally.

The idea that this rally will be sustained has precious few buyers in the industry: Wolfe Research, for instance, noted that this was due to deeply oversold conditions being disposed off (incidentally: this is a pretty fair summary for the last few rounds of “Friday bumps” seen in tech stocks as well). Wolfe Research continues to maintain an intermediate-term bearish outlook and states that the next phase would be driven by rising recession risks and downward earnings revisions.

This week will see a host of data being released, including May updates to home sales, the Personal Consumption Expenditures Index, the Purchasing Managers’ Index, Eurozone unemployment rates and inflation statistics. Furthermore, first-quarter GDP growth rate is expected to be finalized and there’s an expectation of the 1.5% contraction will be confirmed.

The Street is cautious and for good reason: minute improvements will likely not find a lot of takers for a sustained rally.

For those looking at Wall Street analysts’ ratings for many high-conviction stocks and wondering why many of them are still on “Buy”, it bears noting that these ratings are derived from the company’s balance sheet and financials as opposed to the stock’s current valuation. Fund managers and prominent investors have voiced concerns about overvaluation in the U.S. equity market for almost 5 years now. Overvaluation divorces the stock’s performance from the company’s, with the latter taking outsized cues from the latter in the best of times and finding little purchase in the worst of times.

In Conclusion

The Street is wise to be cautious and so should retail investors. Given how inflationary concerns have still not been addressed, it would be a good time to consolidate and consider the situation carefully. For disciplined tactical investors wishing to capitalize on the churn evident now, this would be a good time to consider short-term leveraged/leveraged inverse instruments while the dust begins to settle.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Senior Analyst

Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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