The latest stock sell-off is a ‘healthy pullback’ and investors should refrain from panicking, according to one technical analyst

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A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 9, 2020.

  • The ongoing sell-off in the stock market represents a “healthy pullback,” technical analyst Katie Stockton said in a note on Monday.
  • The S&P 500 is down about 3% from its record high, with losses accelerating in Monday’s trading session.
  • “We think the pullback will be short-lived, maturing later this week,” Stockton said.
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A sell-off in US stocks accelerated on Monday, with the S&P 500 falling as much as 2% amid investor concerns about rising COVID-19 cases due to the Delta variant.

But technical analyst Katie Stockton of Fairlead Strategies views the sell-off in stocks as a “healthy pullback” that will likely be short-lived and could present a buying opportunity, according to a Monday note.

The S&P 500 fell below its 20-day moving average on Monday for the first time since June, when a four-day pullback took hold in the market.

“But we think [this] pullback will be similarly short-lived, maturing later this week with the McClellan Oscillator and daily stochastics having already fallen to levels associated with the June low,” Stockton explained.

The McClellan Oscillator measures market breadth, which has been deteriorating in recent weeks as mega-cap tech stocks like Apple and Amazon led the market higher. Meanwhile, the Stochastic Oscillator is a momentum indicator that helps identify overbought and oversold levels of a specific security.

Stockton sees support for the S&P 500 at its 50-day moving average, which sits at 4,240 at time of publication. So far, that support has held, with the S&P 500 hitting an intra-day low of 4,239.82 before paring its losses.

“I think the market is getting flushed out here,” Stockton told Insider, adding that she is seeing lots of extremes in certain market indicators. Stockton said the S&P 500 e-mini futures flashed a DeMark “13 buy” signal, which hasn’t occured since June 21.

“I would be looking for opportunities to add exposure (and, cover shorts) in the coming days assuming the signal gives way to stabilization,” Stockton said.

Stockton isn’t alone in thinking that the current sell-off in stocks may be limited. Fundstrat’s Tom Lee argued in a note on Monday that the COVID-19 Delta variant represents “more bark than bite” and that the current sell-off sets stocks up well for a rally in the second half of the year.

S&P 500 futures stock chart
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A big sell-off in the stock market is unlikely for these 2 reasons, according to Fundstrat’s Tom Lee

Tom Lee
  • A large sell-off in the stock market is unlikely for 2 key reasons, Fundstrat’s Tom Lee said in a note on Monday.
  • Recent weakness in stocks can be largely attributed to rising COVID-19 cases, according to Lee.
  • “July chop ultimately a great set-up for risk assets to rally in 2H2021,” Lee said.
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Recent weakness in the stock market will likely be short-lived and won’t extend into a large decline for two key reasons, Fundstrat’s Tom Lee said in a note on Monday.

The stock market saw a steep drop to start this week, but Lee is maintaining a bullish outlook on steady bond yield spreads and a stable VIX term structure, according to the note.

Bond yields being stable relative to Treasuries is a positive signal for stocks, while the VIX term structure usually inverts when a correction looms. Right now, the VIX term structure, which is the difference between four-month and 1-month VIX contracts, remains flat, according to Lee.

As of Monday morning, the S&P 500 is down nearly 3% from its record high. According to Lee, the decline is tied to the recent uptick in daily COVID-19 cases due to the fast-spreading Delta variant among unvaccinated individuals.

But the rising COVID-19 cases represent more bark than bite, according to Lee, who doesn’t expect the decline in stocks to extend into a meaningful sell-off.

“We don’t expect this period of chop to lead to a larger 10%-like decline for markets. Sure, a 3%-5% sell-off, even to S&P 500 4,100 is possible,” Lee said.

Instead, Lee expects the current weakness in stocks to ultimately be “a great set-up for risk assets to rally” in the second half of 2021, especially as the ongoing rise in COVID-19 cases likely peaks sometime in August, according to the note.

“If India saw cases peak within 4-6 weeks from initial surge, we expect USA, UK and Israel to see similar trajectories,” Lee explained.

To take advantage of the potential rally in stocks later this year, Lee suggests investors focus on buying epicenter stocks that are poised to benefit from the ongoing reopening of the economy, as well as mega-cap tech stocks.

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Investing in Square today is like buying JPMorgan in 1871 as the payment company’s Cash App realizes its growth potential, Mizuho says

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Peter Tuchman, right, works among fellow traders at a post on the floor of the New York Stock Exchange, Wednesday, March 4, 2020.

  • Buying shares of Square today is like investing in JPMorgan at its founding in 1871, Mizuho said in a note on Thursday.
  • Mizuho believes Square’s Cash App will become the ultimate neo-bank and money center bank of the future.
  • The firm rates Square as a “Buy” with a $380 price target, representing potential upside of 59%.
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Square’s Cash App has so much upside potential that buying shares in the fintech company today is anagolous to investing in JPMorgan at its founding in 1871, Mizuho said in a note on Thursday.

“We believe Cash App may be en route to becoming the ultimate neo-bank and the money center bank of the future,” Mizuho said.

The firm sees a visible path for Cash App products to more than quintuple its average revenue per user to $200, and estimates the money sending app can capture a large portion of the US bank account total addressable market of 400 to 500 million accounts, according to the note.

Mizuho estimates that Square’s Cash App currently has between 30 and 40 million users, and that legacy banks like JPMorgan and Wells Fargo generate average revenue per user between $400 and $700, implying lots of upside potential for Square’s growth trajectory.

“With vast potential upside to average revenue per user and users, we believe Cash App’s gross profit could see 4x-8x growth over the coming years,” Mizuho explained, adding that it views Cash App as the “ultimate challenger bank.”

The product fronts Mizuho expects Square to tackle (and dominate) over the coming years includes retail crypto and stock trading, buy-now-pay-later, insurance, mortgage and auto loans, and tax services, among others, according to the note.

While the comparison between Square and JPMorgan in 1871 makes for a good headline, it’s worth noting that the predecessor to America’s largest bank didn’t go public until 1942.

Mizuho reiterated its “Buy” rating on Square and set a price target of $380, representing potential upside of 59% from Wednesday’s close. Shares of Square were down about 1% in Thursday trades, and are up 8% year-to-date.

Square's Cash App analysis
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The S&P 500 could jump 9% by year-end as a reversal in interest rates drives a rebound in the struggling reflation trade, Fundstrat’s Tom Lee says

Tom Lee

The stock market is on track to continue its uptrend and surge as much as 9% by year-end, Fundstrat’s Tom Lee said in an interview with CNBC on Friday.

Lee said the S&P 500 could surge to 4,700 by year-end as “strong markets stay strong,” representing potential upside of 9% from Thursday’s close. That move higher will likely be driven by cyclical stocks as interest rates drift back towards their recent cycle-high of 1.75%.

Since the start of June, the 10-Year US Treasury rate has fallen to as low as 1.27% as investors question the durability of the post-pandemic economic recovery and expectations of higher inflation. The drop in rates helped fuel a rotation out of value and into growth stocks, but according to Lee, rates and growth stocks could begin to rise together as they become “detached” from their often inverse relationship.

“I think FAANG is going to detach itself from interest rates, meaning they’re going to have a great second half, not because rates are going to fall, but because these are great companies that almost did nothing during the first half [of 2021]. We think if the S&P 500 ends the year up 25%, and a lot of these FAANGs are up 5%, they could be up 20% in the second half, that makes them an overweight,” Lee told CNBC.

While Lee believes mega-cap tech stocks in the “FAANG” group can continue to perform well, epicenter stocks tied to the physical reopening of the economy will be best positioned for more upside.

“Epicenter stocks will rally strongly, as they are the most sensitive to rising rates,” Lee said in a note on Friday.

Chart of interest rates and epicenter stocks

And within epicenter stocks, Lee has the most conviction on the energy sector, as bullish divergences between energy stocks and oil prices continue into the back half of the year. Lee sees a potential squeeze in the supply of oil occuring just as the economy gets back on its feet and demand is high, likely leading to a continued uptrend in prices.

“[Oil] Supply will get even tighter into 2022 as the $300 billion in shortfall in capex past 24 months robs future production capacity,” Lee explained. Those potential supply constraints come as OPEC members fail to reach a deal on an expected production increase.

“Bottom line: If interest rates reverse, buy epicenter which is gonna rally most,” Lee concluded.

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Don’t be surprised if ether takes over bitcoin as the dominant digital store of value, Goldman Sachs says

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Mastercard and BNY Mellon warmed to bitcoin on Thursday, supporting XRP, ether and other cryptocurrencies

  • Ether could overtake bitcoin as the dominant digital store of value in the coming years, Goldman Sachs said in a Tuesday note.
  • Ether “looks like the cryptocurrency with the highest real use potential,” Goldman argued.
  • “This competition among cryptocurrencies is another risk factor that prevents them from becoming safehaven assets,” Goldman said.
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Ether’s real use cases give it the potential to become the dominant digital store of value in the coming years, Goldman Sachs said in a note on Tuesday.

The bank believes ether “currently looks like the cryptocurrency with the highest real use potential as Ethereum, the platform on which it is the native digital currency, is the most popular development platform for smart contract applications,” according to the note.

That means ether could eventually overtake bitcoin as the top cryptocurrency, according to Goldman. While bitcoin may have the stronger brand given its first mover advantage, it lacks some of the often-cited real use cases of ether, in part due to its slow transaction speed of just seven per second.

But regardless of which cryptocurrency reigns supreme, neither will be able to overtake gold any time soon, Goldman said, arguing that its high volatility doesn’t make it a direct competitor to a safe haven asset like gold.

“Gold is competing with crypto to the same extent it is competing with other risky assets such as equities and cyclical commodities. We view gold as a defensive inflation hedge and crypto as a risk-on inflation hedge,” Goldman explained.

And the competition between different crypto assets is also hurting its ability to become an asset class that investors view as safe.

“This competition among cryptocurrencies is another risk factor that prevents them from becoming safehaven assets at this stage,” Goldman concluded. As of Tuesday afternoon, there are 10,772 different cryptocurrencies in existence, according to data from CoinMarketCap.

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Gold will outperform crypto as an inflation hedge and has 38% upside if economic growth slows, Goldman Sachs says

Bitcoin vs. Gold
Bitcoin vs. Gold

  • Gold is undervalued and has up to 38% potential upside if the economy slows, Goldman Sachs said in a Tuesday note.
  • The bank expects gold to serve as a better inflation hedge than cryptocurrencies, the note said.
  • “Overall we see crypto still far from becoming a defensive long-term store of value like gold,” Goldman said.
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At about $1,800 per ounce, the current price of gold is pricing in a “goldilocks scenario” of moderate inflation and a continued global economic recovery from the COVID-19 pandemic, Goldman Sachs said in a Tuesday note.

But if inflation sees a higher than expected surge, or if the global economic recovery falters, there is significant upside to the price of gold, according to Goldman.

“In a scenario where the global economic recovery does not play out as expected or inflation begins to move materially above expectations, we see material upside to gold given its undervaluation and low allocation from the investment community,” Goldman said.

The bank sees gold hitting as high as $2,500, representing 38% upside potential from current levels in the event that US investors’ allocation to gold ETFs rises to its 2011 peak of 0.7% of their portfolio. Given the significant upside, Goldman views gold as a “good strategic purchase” for investment managers that want to hedge against tail risks.

Adding to the potential upside in gold is if the Fed under-reacts to rising inflation and and a slowing global economy. This scenario would drive investors to more defensive assets, according to Goldman.

“In our view, this implies gold can outperform cryptocurrencies, which we view as more risk-on inflation hedges. Overall we see crypto still far from becoming a defensive long-term store of value like gold,” Goldman said.

But if the global economic recovery continues to hum along and inflation remains moderate, Goldman only sees gold hitting $2,000, representing potential upside of 10% from current levels. The price of gold is down 4% year-to-date.

“Ultimately, a number of uncertainties are still hanging over the global economy. Therefore, gold may be a good strategic purchase for portfolio managers looking to hedge against tail risks of macro volatility,” Goldman concluded.

Read more: Goldman Sachs says buy these 20 stocks have the most upside potential right now – including 5 set to surge by at least 50%

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Uber’s investment in Didi could help unlock 40% upside potential in the US ride hailing giant’s stock, Bank of America says

Uber
  • The IPO of Chinese ride-hailing company Didi could help unlock value for shares of Uber, according to Bank of America.
  • Uber owns a 12% stake in Didi, which hit a valuation of about $80 billion on its first day of trading on Wednesday.
  • BofA’s $71 price target for Uber represents potential upside of 40% from Thursday’s close.
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The recent IPO of Chinese ride-hailing giant Didi could help unlock value in shares of Uber, Bank of America said in a note on Friday.

The bank argued that Uber’s 2016 investment in Didi is now worth almost $10 billion. Uber owns about 12% of Didi, which touched a valuation of nearly $80 billion in its first day of trading on Wednesday. Uber had most recently pegged the value of its Didi stake at $5.9 billion, meaning there is upside to Uber’s assigned asset value that could help boost the stock price.

“Based on 1.9 billion shares outstanding for Uber, we estimate that translates to an incremental ~$2 per share in equity value for Uber,” BofA explained.

The bank rates Uber at a “Buy” and has a $71 price target, representing potential upside of 40% from Thursday’s close. And there’s even further room higher based on a sum-of-the-parts valuation, in which the BofA assigns a $90 per share value for Uber. A move to $90 would represent potential upside of 78%.

Despite BofA’s bullish outlook for Uber, the stock has considerably underperformed its peers like Lyft and DoorDash year-to-date. Shares of Uber are down 1% year-to-date, while Lyft and DoorDash are up about 27% and 26%, respectively.

The bank highlighted four overhangs the stock is currently facing, including a large seller of Uber stock in June that may have impacted supply and demand dynamics, Uber’s guidance suggesting bigger driver incentives, Uber’s international exposure, and a larger-than-expected UK driver settlement amount.

“While it’s hard to say if any one of these issues is the core drive for Uber’s relative underperformance, we reiterate our Buy rating as we think some of the overhang could clear in 3Q with further reopening and vaccination progress,” BofA said.

The bank expects Uber to reach breakeven profitability by the end of the year.

Read more: Bank of America names 5 semiconductor stocks to buy for the 2nd half of 2021 – and breaks down why each has ‘catch-up potential’ after lagging since January

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The Delta variant of COVID-19 does not pose a risk to the stock market and could help boost value and yields, JPMorgan says

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  • The spread of the Delta variant of COVID-19 poses no risk to the stock market, JPMorgan said in a note.
  • Value stocks and bond yields are poised for a rebound as investors reassess risks of the variant.
  • “The Delta variant should not have significant repercussions for the pandemic situation in developed markets due to the level of population immunity,” JPMorgan explained.
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The spread of COVID-19’s Delta variant does not pose a risk to the stock market, and could in-turn drive a rebound in value stocks and bond yields, JPMorgan said in a note on Wednesday.

The spread of the delta variant has been front of mind for many investors in recent weeks, as data suggests it is now the most common strain of COVID in the US. The fast spreading variant has led to a surge in cases in countries like the UK and Israel, and some governments are responding by reinstituting mask mandates and lockdown initiatives.

But “the Delta variant should not have significant repercussions for the pandemic situation in developed markets due to the level of population immunity,” JPMorgan said, adding that stock market positioning should not be driven by any variant of COVID-19 for which vaccines are effective.

Both Pfizer and Moderna have said that their COVID-19 vaccines are highly effective in preventing infection of the Delta variant.

The bank pointed to market action when the B.1.1.7 variant of COVID-19 which was spreading across the country earlier this year as reason for why value stocks and bond yields should see a rebound going forward.

“When the market properly assessed the risk of B.1.1.7, yields and value staged a strong rally from mid-February to mid-March, while growth stocks (often perceived as beneficiaries of lockdowns) sold off,” JPMorgan explained. “We expect this to repeat now as investors assess the so-called Delta variant,” the bank added.

The current market setup with the Delta variant is similar given that growth stocks have been in favor relative to value stocks amid the spread of the new COVID strain. But if JPMorgan’s analysis proves correct, that trade should unwind soon, and growth stocks should once again underperform value stocks.

“We reiterate our view to go long reflation, cyclical and value trades, and sell growth and defensive positions,” JPMorgan concluded.

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The S&P 500 could surge 3% by Wednesday amid a trifecta of positive signals, Fundstrat’s Tom Lee says

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  • A trifecta of positive signals could send the S&P 500 soaring 3% by this Wednesday, Fundstrat’s Tom Lee said in a note on Friday.
  • A rally in junk bonds, a collapse in the VIX, and falling treasury yields all point to a higher stock market.
  • “I take this as a risk-on signal, raising the probabilities that the S&P 500 sees 4,400 before month-end,” Lee said.
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The S&P 500 is primed for a 3% surge to 4,400 by this Wednesday, Fundstrat’s Tom Lee said in a note on Friday.

Lee sees a “trifecta” of risk-on signals driving the stock market higher, including record highs in junk bonds, a collapse in Wall Street’s fear gauge, and falling treasury yields.

“This is a positive set-up and something not seen for some time,” Lee said, adding that he expects mega-cap tech and energy stocks to drive much of the gains.

The record high in junk bonds on Thursday lends credibility to the recent rally in stocks, Lee said, given that high-yield bonds have historically served as a leading indicator to equities. And according to Lee, the rally in junk bonds is for the right reasons, including a stronger economy and stable interest rates.

Meanwhile, the volatility index collapsed below 16 on Friday, marking its lowest level since the start of the COVID-19 pandemic.

The (falling) Volatility Index

Equity returns have been strong amid similar periods of normalization for the VIX, with the S&P 500 gaining on average 23% over the next 12 months, according to the note. That’s in part because as the VIX falls, systematic hedge funds usually add leverage and buy stocks, pushing asset prices higher.

Finally, a decline in treasury yields from their mid-March peak has fueled gains in mega-cap tech stocks, which should continue to drive the market higher going forward, according to Lee.

A chart of the 10-year US Treasury yield

“While many might fret that interest rates are stabilizing around 1.5%, we think this is a positive risk-on signal,” Lee said, before explaining that valuations for fast growing tech stocks usually drift higher during low interest rate environments.

“2021 [is] tracking to be a +20% year,” Lee said. The S&P 500 is up about 14% year-to-date as of Friday afternoon.

While it “certainly seems to be a tall order for the S&P 500 to rally to 4,400 before month-end…I think it could happen,” Lee concluded.

“OK. Maybe by mid-July,” Lee hedged.

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Institutions are not buying the dip in bitcoin, and it’s fair value could be as low as $23,000, JPMorgan says

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  • Institutions are not buying the dip in bitcoin, according to a Wednesday note from JPMorgan.
  • The bank said the fair value of bitcoin over the medium-term could range from $23,000-$35,000.
  • Headwinds still exist for bitcoin, including the end of a six-month lock up period for nearly $4 billion worth of the Grayscale Bitcoin Trust.
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The recent decline in bitcoin may take time to recover as institutions fail to step in and buy the dip, according to a Wednesday note from JPMorgan.

The bank sees the fair value of bitcoin over the medium-term at $23,000-$35,000, based on the current volatility ratio of bitcoin to gold. Previously, JPMorgan outlined how bitcoin could hit $140,000 if it matches the allocation and volatility profile of gold.

But on Wednesday, the bank said, “full convergence or equalization of volatilities or allocations [between gold and bitcoin] is unlikely in the foreseeable future.”

Bitcoin has seen its value plummet about 50% since its peak in mid-April, and many have attributed part of that decline to China’s crackdown on cryptocurrency mining. But JPMorgan views the recent developments out of China as a positive for bitcoin in the long-term.

“The crackdown on mining operations in China should be considered as positive for bitcoin over the medium-term as it accelerates a shift away from China’s high share in bitcoin’s hash rate, reducing concentration,” JPMorgan said.

The bank views bitcoin’s recent decline more of a continuation of weak flows and price dynamics, rather than pinning it on China’s mining crackdown. And the weak flows suggest institutions are not stepping in to buy the dip in bitcoin at current levels.

“More than a month after the May 19 crypto crash, bitcoin funds continue to bleed, even as inflows into physical gold ETFs stopped. This suggests that institutional investors, who tend to invest via regulated vehicles such as publicly listed bitcoin funds or CME bitcoin futures, still exhibit little appetite to buy the bitcoin dip,” the note said.

Finally, JPMorgan sees one big headwind remaining for bitcoin: the expected selling of the Grayscale Bitcoin Trust following the end of a six-month lock-up period. The bank noted that nearly $4 billion flowed into the trust fund in December and January and is subject to the six-month lock-up period. That period ends in June and July, and investors will likely sell at least some of the trust fund given the recent volatility.

“Despite this week’s correction we are reluctant to abandon our negative outlook for bitcoin and crypto markets more generally. Despite some improvement, our signals remain overall bearish,” JPMorgan concluded.

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