POSTED BY ANGUS GEDDES
On Friday all the major US indices posted strong gains as the tech-heavy Nasdaq gained 1.71%, the Dow advanced 1.39% and as the S&P 500 added 1.28%. Berkshire Hathaway’s announcement that it had acquired a further 75 million shares in Apple and a relatively benign nonfarm payrolls data print provided the impetus for the rally. US Treasuries were range bound, the dollar remained buoyant while precious metals had moderate gains and oil staged a big rally lifting 2%.
The S&P500 continues to converge within a contracting triangle range so Friday’s upward dynamic was very positive, pushing the index back up into the middle of the range. Importantly, the S&P500 seems to be rejecting the ‘bear case scenario’ with the 200 day moving average providing strong support on each respective selloff.
A breakout in “one direction or another” is probably now only a matter of time – and likely to occur at some point in the next few months. I wrote last week, that I think the outcome will potentially be a “topside breakout” – particularly now with the Volatility Index testing key support at 14 and confidence returning by the day. Sentiment still remains very fragile and skewed towards the negative end of the spectrum – but market temperament seems to be improving.
Another supporting factor is that the overall market valuation is relatively attractive following one of the best reporting quarters on record. I wasn’t too surprised then to see Warren Buffett out buying more Apple. The economic data coming through points to a robust economy that is performing and this is providing a constructive background for the stock market.
Additionally, the positive economic data combined with a relatively benign inflationary settings will serve to underpin corporate earnings in the June quarter. In the next few weeks Wall Street will begin to focus once again on earnings and valuation and recalibrating models. We will likely get a number of upgrades and maybe some downgrades coming through and while it is probable that earnings growth will slow, with the S&P500 now trading on a 15X 2019 multiple, much of this has already been priced in – which in turn serves to mitigate downside risk.
In other trading, logistics leviathan FedEx added 1.1%. Among technology stocks, Cisco was up 1.9%, Google-parent Alphabet gained 2.4% and Baidu closed 0.3% lower. Homebuilders DR Horton and Lennar gained 0.7% and 1.5% respectively, while online real estate portal Zillow closed 3% higher.
Walt Disney shares lifted 2.4% and news over the weekend shows no signs of slowing down for Avengers: Infinity War. The movie crossed $1 billion at the global box office on Saturday, just 11 days after release to set a record for the fastest time that feat has been achieved.
In other positive news for Disney’s thriving movie business, presales of Solo: A Star Wars Story have outsold presales of Black Panther, by two times in the first 24 hours of their release on Fandango, an American ticketing company. The movie hits US cinemas on May 25 and is the Hans Solo origin story, directed by Ron Howard. Chances are this will be another blockbuster.
In corporate news and trading, in Frankfurt speciality chemicals company Lanxess surged 7.5% after reporting higher Q1 profits and lifted its full year guidance. Luxury automaker giant BMW slipped 0.6% as first quarter revenues were crimped by currency movements. Heidelberg Cement shares advanced 1.5%. Volkswagen shares slid 3.2% after former CEO Martin Winterkorn was charged in the United States over the diesel scandal
In other trading, the Spanish banks Caixabank and Bankia closed 2% and 1.1% higher respectively. The air traffic controller ENAV advanced 0.6%, as did Telepizza Group, while Heineken and LVMH both added 0.2%.
In Hong Kong trading, technology, financials and property were among the bigger laggards. In individual trading telecommunications firm China Unicom slipped 2.2%, while insurer Ping An closed 1.4% lower even as the healthcare technology company it backed opened higher on its trading debut on the Hong Kong main board. On the technology side internet conglomerate Tencent Holdings drifted down 0.6% and Sunny Optical lost 1.1%. Energy giant CNOOC bucked the trend and added 0.5% in trading.
After a strong rally earlier in the week on strong April gaming activity in Macau, the casino stocks Sands China, MGM China and Wynn Macau traded down 1.1% to 2.2% on some profit taking.
Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in: Baidu, Disney, Coeur, Caixabank, Heidelberg, Telepizza, Volkswagen, BHP, Sunny Optical, CNOOC, Sands China, MGM China and Wynn Macau.