Market analysis - calendar week 31/2022

Chart of the week

The chart shows how much money flows into the stock market each week. The last few months this amount was negative, meaning more people sold than bought. In the last week, this has turned around.

Why this is important

Despite the many technical terms used in the stock market, the basic principle is actually quite simple. When more people buy than sell, the stock market rises, and when more sell than buy, the stock market falls.
So if you can make a prediction about the buying behavior of investors, it helps to predict the price movements to some extent.
Normally, investor behavior moves in certain trends. There is no strong buying one week and selling the next. Currently, we see a strong momentum on the buying side. After weeks of astonishingly high sales figures, the stock market was also correspondingly oversold. The positive trend should continue for a few more weeks.

Stable stock market despite uncertainties in Taiwan

Surprisingly, the conflict over Taiwan was not an issue on the stock exchange. Market participants consider it unrealistic that China could really attack Taiwan. This attitude is not without danger. Even when Russia attacked Ukraine, many thought it was unrealistic.
Most % of all computer and cell phone chips come from Taiwan. An attack by China would also put China itself in trouble. China imports chips for more money than oil. Moreover, Xi Jinping is under political pressure. The real estate crisis in which large parts of the middle class have lost everything they had, the COVID zero policy and the high youth unemployment of 18% do not make his third re-election as president seem clear. This may be a trigger for the current threats, an enemy from outside uniting the country, but also the reason not to strike now. Economic sanctions like those against Russia would hit China at a bad time, when the country is struggling.
Decisive for the good mood on the stock market were the many good (of the less bad than feared) business reports of the companies. Most of them were able to meet or exceed expectations. There is currently no sign of a recession.

The graph shows the trend in the quantity of all jobs in the USA outside the agricultural sector (nonfarm payrolls). Jobs from the agricultural sector are very volatile and seasonal and are therefore usually excluded from the statistics.
The labor market report was eagerly awaited this week. There were also many new jobs created in July. All jobs that were eliminated due to the COVID crisis have now been created again.
The next week on the stock market will probably be dominated by the publication of producer prices. On Thursday, the July value of the consumer price index will be published.  A moderate increase of 0.3% is expected (after an increase of +1.3% in June). In the base value (excluding energy and agriculture), an increase of 0.6% is expected (after an increase of 0.7% in June).
Growth is thus expected to decline. This is justified by falling producer prices.

The chart shows the development of producer prices in the USA (green, ISM Index) and consumer prices (white, CPI). Producer prices are losing momentum and, with some delay, consumer prices should therefore also correct downward. However, the war in Ukraine and persistent imbalances in international supply chains continue to be disruptive factors.
Another reason that currently makes us feel positive is that many market participants are currently not invested or only slightly invested.

The chart shows the net position with which institutional investors are active. For this purpose, all positions of forward transactions (futures and options) are considered in which investors are "long" and speculate on a rising stock market, subtracted from all "short" positions in which investors speculate on a falling stock market.  
The value is lower than it has been for a long time. Until now, such low levels usually resulted in a trend reversal with rising stock market values.

How long will the recovery in growth stocks continue?

The ARK Innovation Fund, launched by Kathie Wood, is a household name to many. It is considered an example of an investment strategy in the hot tech companies of recent years. The ETF invests almost exclusively in companies that have an innovative business model but have never made a profit, so have to finance all their operations with debt. The stock market valuation of these companies has exploded during the COVID period. At times, the ARK Innovation ETF has quintupled in value.

The chart shows the performance of the ARK Innovation ETF compared to the NASDAQ during the technology bubble and its burst from 1998 to 2004.
What hurt the innovative technology companies in the ARK Innovation Fund were the steeply rising interest rates, as all business activity has to be financed with loans.

The chart shows the value development of the US technology exchange NASDAQ with the interest rate of 10-year government bonds. It is amazing how the lines run counter-parallel. In other words, an almost perfect anti-correlation. When interest rates go up, the tech stock market goes down, and when interest rates go down (as they have from mid-June to today), the NASDAQ rallies.
Even though things have calmed down a bit on the interest rate front, we can still expect interest rates to continue to rise over the next 12 to 24 months. We therefore maintain our overweight in value stocks.

Additional image sources: Anfangsgrafik Designed by Freepik

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