• Will the US/China trade issue resolution carry a positive outcome for equities?

    Short-term analysis

    In the past days, we can see that the 20DMF has shown a more negative pattern than the S&P500.



    The small caps have themselves been under heavy selling.



    This is certainly a negative warning. However, we can see that the 20DMF itself is still rather high above its short level.



    On the currencies front, we can see that the US$/Euro is rather strong.





    This is consistent with a selling of the 10Y (This indicate equities bullishness as investors expect rates to increase)



    Short-term conclusion:

    One of the reason behind this expectation is probably the fact that elections in HK seem to be proceeding in a calm way, which would give a good pretext for Trump to Veto the latest HK bill. This would lead the way to a fast trade agreement signature.

    Long-term analysis

    The long-term analysis is more an opportunity cost analysis that includes the 10Y Treasuries yields, the 10Y High Quality Corporate bonds yields and the S&P500 earnings yields.

    We can see below that the Green line - the S&P500 earnings yields - must always be higher than the Pink line - the 10Y High Quality Corporate bonds yields. This is easy to understand: in order to continue attracting money, the S&P500 expected earnings must yield more than the bonds returns from the best corporations. If it is not the case, then investors chose to sell equities and purchase corporate bonds. Or worst: in a crash investors sell both equities and corporate bonds.

    So in any case, a reversal of the Green line below the Pink one indicates that equities prices are too high and must fall. This occured in mid-2007 and also almost in September 2018. In September 2018, equities pulled back, pushing the Green line higher and a few months after the Fed decided to lower interest rates, following this decision by a 2019 renewed QE decision.This triggered an extended move of the Green line away from the Pink line and hence a renewed rush into equities.



    If we analyse the distance between the Green and the Pink lines -shown below in Red -, we can see that most equities pull backs occured when the Red line found a through. To be honest, it is the opposite: the Red line found a through when equities pulled back, pushing the S&P500 earnings rates higher. These triggered renewed buyback programs as High Quality companies could easily borrow in order to fund their shares buybacks. We can see at the right of the Figure below that the distance between the two lines still almost sits at a 2% level. This indicates that buy backs will continue.
    I would start to worry about equities if that Red line pulls down closer to the 0% level. This move could easily take two to three months.



    Another interesting comparative analysis is the difference between the 10Y HQ Yields and the 10Y bonds yields. It is natural for the 10Y HQ corporate bonds to yield more than the 10 Treasuries. Hence, the Red line is ALWAYS positive.

    Now, it is interesting to see that the period when the Red line was around the 1% level were periods of exuberant risk taking. We are in such a period now and we can see that the Red line still has some room before reaching the 1% level. This Figure thus tells us that the market has some more room for a move higher that could last up to the end of January.



    Long-term conclusions:

    If a large pullback is going to occur in the coming days/weeks it is for sure not shown the the above Figures. What is shown is an extended buying exuberance move that could probably continue well after the US/China deal is signed.

    My Longer-term long positions

    I only have two long positions here and no short.

    BMY has purchased CELG and is now one of the lowest priced large drug manufacturer. I have a 20% price increase target from here going into mid of 2020.



    MYL is a really battere-down generic drug manufacturer. The point is that after the last earnings, the stock has attracted incredible buying. MYL has signed a deal with PFE to combine by mid of 2020 with the generics arm entity of PFE, making hence the largest generic drugs manufacturer.

    This is a complete new birth for MYL. Current shareholders will get 43% of the new entity. I believe that this is a rare opportunity.