Unum Capital: Market Commentary, Trade Ideas and Technical Research

Unum Capital: Market Commentary, Trade Ideas and Technical Research

Research – 02 September 2019

Lester Davids, Unum Trading Desk

 

Market Overview:

 

Stocks on the JSE ended the week strongly, with a 1.56% gain seen on Friday while total gain for the week stood at 2.34%. This gain saw the All Share Index close at a 2-week high. Driving performance for the week were a number of share across various sectors. These included Impala Platinum (+14.04%), Anglo American Platinum (13.70%), Mr Price (+10.68%), Discovery (+10.17%) and Bid Corp (+8.64%). On the downside Shoprite (-2.84%), Multichoice (-1.53%) and Capitec Bank (-0.22%) failed to advance. On the currency front, the Rand made a marginal gain versus the US Dollar, advancing by 0.48% for the week while rallying 1.43% against the British Pound and 1.78% versus the Euro. In Europe, the Stoxx600 added 2.45% for the week while the Stoxx50 did even better with a 4.22% march upwards. Wall Street closed practically unchanged on Friday on the final day of a volatile month dominated by trade policy uncertainty. A pause in the escalation of tariff threats between the US and China, faster-than-expected personal spending in the US and contained inflation all added to sentiment on Friday. In contrast, a decline in oil prices weighed on energy stocks. The Dow Jones edged up 0.2% or 41 points; the S&P rose 0.1% or 2 points, and the Nasdaq declined 0.1% or 11 points. This morning in Asia, the scorecard is as follows: Nikkei (-0.39%), Hang Seng (-0.63%), Shanghai Composite (+1.1%), Kospi (+0.11%), ASX (-0.38%), Tencent (+1.82%), BHP Billiton (+0.59%). Please note that for today the US and Canada is closed for Labour Day.

Trade Ideas Update: In terms of the recent trade ideas, there have been seven (7) positives and two (2) negatives. In the losing lane, the short idea Harmony Gold tested it’s stop-loss before moving lower while Shoprite failed to move higher. The JSE Ltd reached it’s take profit target while Netcare, Coronation Fund Managers, Old Mutual, Tiger Brands, Nepi Rockcastle, AVI Ltd and Telkom were all in positive territory by the close on Friday.

 

 

Technical Insights and Strategies

 

All Country World Equity Index ETF (ACWI) vs iShares South Africa ETF (EZA): In the short term, South African equities are starting to outperform it’s global peers in US Dollar Terms. This is a reflected in the relative chart of the iShares MSCI South Africa ETF (EZA) vs the iShares MSCI All Country World ETF (ACWI) where on Friday we saw relative out-performance of 2.53%. The short term does also reflect a potential directional change from bearish to bullish with the price clearing it’s  short term moving averages which have also started to point higher while the Money Flow Index and Relative Strength Index have started to trend up. https://www.tradingview.com/x/nTdSwTZo/
US Dollar / South African Rand: It’s been an almost perfect test of the rounding formation resistance level at around 15.40. Here we have seen the price retreat, with Friday’s close of 15.15 and an early Monday print of R15.21 . The candle structure is signifying moderate Rand strength while the RSI is trending lower and the Money Flow Index is suggesting recent outflows from the pair. A break below the R15.12 opens up R14.99 followed by R14.89. On the upside, resistance remains strong at R15.46. This morning the technical indicators have started to turn up slightly, suggesting possibly range-bound trading activity. https://www.tradingview.com/x/7OVtkdey/
JSE Banks vs JSE Retailers: Daily Chart – Relative to each other, the sectors remain range-bound however offering short term relative tactical opportunities. At current levels the price trades in the middle of a range with the last session having seen the Banking index out-performing the General Retail Index by 1.5% for the session.   https://www.tradingview.com/x/6LKSRz3U/
JSE Healthcare vs JSE Gold: From a relative sector perspective, being long JSE healthcare stocks and short JSE gold stocks may just where traders could add alpha. On the relative chart, we have seen the “three soldiers” candle formation while the RSI has printed a bullish divergence. On the healthcare index, the RSI has broken it’s year to date overhead resistance while the gold index is printing a bearish divergence.

 

Last week we highlighted NTC as a short term buy and also noted MEI having closed above the 200-day moving average for the first time in 15 months (MEI could be developing a medium term upward trend).  

https://www.tradingview.com/x/ZKbx8iiM/
EOH: The value traded along with the market cap on this share has dwindled significantly. Valued at R2.4bn on the JSE and with R1.5m traded on Friday, it’s become less liquid than in previous years. I will however express my technical view on the counter: Although the share has been trading in a tight downward trend, signs of a possible short term reversal is starting to emerge. Firstly, the RSI attempting to move up from an oversold/weak level. Secondly, the Money Flow Index has made a new 5-week high, having traded above it’s near term moving averages. What I would like to see is the following: A print and strong price action above R14.08, an increase value trade along with a strong candle structure as confirmation that the price has the potential to make a short term reversal. https://www.tradingview.com/x/YA0QEIyb/
Pairs Trading: A pairs trade is a trading strategy that involves matching a long position with a short position in two instruments (stocks, commodities, inidces etc) with a high correlation. It is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. The strategy monitors performance of two historically correlated securities. When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the under-performing one, betting that the “spread” between the two would eventually converge. The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on. On the local market examples of pair trades include Long Shoprite/Short Woolworths or Long Anglo American/Short Sasol.
Pairs Trade Idea: Long Sappi/Short Mondi – On a relative basis, Sappi has underperformed Mondi and at current levels the pair looks to stabilizing (losing some downside momentum) to set up a possible bullish reversal where a trader would look to buy Sappi (SAP) while simultaneously going short (selling) the shares of Mondi plc (MNP). https://www.tradingview.com/x/TtIB63sd/
Pairs Trade Idea: Long Dischem Pharmacies/Short Clicks – Relative to Clicks, Dischem Pharmacies appears to be developing a short term base which may be setting up a bullish reversal. I am monitoring the price for a potential pairs trading opportunity i.e. Long DCP/Short CLS. https://www.tradingview.com/x/Ff0C5G8S/
Pairs Trade Idea: Long Shoprite/Short Woolworths – In the short term, SHP appears excessively oversold vs WHL. The RSI is trading at 13, the lowest level since 2003 (as far back as the chart data goes). This pair (Long SHP/Short WHL) could be a mean reversion opportunity in short term. Let’s see where the price settles before engaging. https://www.tradingview.com/x/AWqVyApb/
Offshore Pairs Trade Ideas:

 

Long IBM/Short Cisco https://www.tradingview.com/x/oKeVtPhb/

Long Papa Johns Pizza/Short Domino’s Pizza https://www.tradingview.com/x/iLM9TicE/

Long Marks & Spencer/Short Sainsbury https://www.tradingview.com/x/0DROev6d/

 

Commodity Trade Idea: Buy/Long Natural Gas – Initial long idea from around $2.09 however there still appears to be a decent trend developing over the medium term. Seasonality: According to EquityClock.com, analysis has revealed that with a buy date of September 2 and a sell date of October 20, investors have benefited from a total return of 56.09% over the last 10 years. This scenario has shown positive results in 7 of those periods. Trade Plan: I would look to buy this commodity at current level of $2.28 (or better), using a stop-loss of $2.19 and a target of $2.55, taking a medium term view. https://www.tradingview.com/x/HsRRvJTP/

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