Vaccine Hopes. Bargains or Bull Traps
The Covid vaccine news proved to be a real catalyst for the market, seeing a rush of buying and some price movements that beggar belief! But is it really cause to get excited, sell the family silver and get it all in the stock market? will the global economy recover quickly, and normal service resumed? Or does caution need to be paid to some of the big movers.
Basically, are they Bargains or Bull Traps?
Clearly the news is good but the road to full economic recovery is still going to be a long one. Not only do services need to be resumed but the global population has to be convinced to get back out there, spend money and go on holiday. Easier said than done with large amounts of uncertainty in the jobs market and a cautious backdrop.
Undoubtedly there has been some huge moves in key stocks but is this the start of the recovery or simply bear traps being sprung on the ftse’s most wounded of gazelles?
We also take a look at a couple of alternative stocks that have been outperforming despite the backdrop.
Rolls Royce gained hugely on the Pfizer announcement, with a near 100% intraday swing. Moves like that would normally be reserved to AIM stocks making huge discoveries or an engine maker that has discovered a new form of propulsion, not an engine manufacturer that was in so much financial trouble recently it needed a heavily discounted rights issue just to survive.
Rolls Royce only gained so much in the short term due to its poor trading leading up to the move, and on relief that the company is not set to go bankrupt in the next few weeks, which was a possibility before the vaccine. But we do need to strike a word of caution as a stock posting such short term gains, can be left vulnerable to sharp drop backs after the news has sunk in, and at this moment its bounce was because it is not as awful as people thought is not a compelling reason to get over excited about a stock longer term. Rolls Royce still have a lot of work to do and are still highly dependant on the Airline industry getting the planes back in the air and clocking up those flight miles.
The First chart for RR below shows how the short-term bullish momentum has taken hold.
Whilst the chart below highlights the longer term downward momentum
Carnival gained just shy of 40% on the vaccine news, again it is easy to see the logic at face value. Covid cure equals a better outlook for a cruise line operator, but the real question is: How much of this news was already priced into the stock? Carnivals key demographic is also an older population which may well see them more reluctant to start cruising again as quickly as say package family holiday operators. As with Rolls Royce, the weekly graph highlights how this stock has been under-performing prior to the Pandemic, the vaccine news will not change this. So, there may be short term trading opportunities around Carnival, but we would not be looking to buy into this one for the long term.
You can see from the Carnival chart below the short-term buying momentum is already slowing down.
Below's chart show Carnivals long-term momentum has been heading lower for quite sometime.
IAG is wallowing down towards its recent multi year lows and has a market cap of just over £5bn. It is another stock which had a bad time running into Covid. The virus cannot really be used by their management as an excuse for its poor share price performance before the outbreak, especially when compared to some of the smaller carriers. There is a space in air travel that has real potential, such as Wizz Air Holdings, a young upstart in the sector but already with a market cap of £3bn and currently trading close to its all-time highs.
IAG was trading above £4.00 pre-Covid, the logic that it will now trade back above £4.00 anytime soon is flawed based on the industry and sector at this point in time, the IAG of today and its market place is very different from the IAG of 12 months ago. There may be some considerable upside to be had but there is still a lot of hurdles for airlines, especially large carriers’ operation on slim margins in the year ahead.
The obvious travel sector targets will provide plenty of trading opportunities in the days ahead, but we would recommend you apply an equal amount of caution.
IAG has certainly shown short-term momentum and is still continuing at the moment, as the chart below shows
However, the longer term has been disappointing for a while, as seen below.
The weekly graph below shows how this carrier is up towards all-time highs, compared to the woeful performance of the larger peers. Staggering in comparison to what has been going on with airlines overall.
While it is tempting to see the “upside” in the likes of IAG compared to Wizz, they are trading down towards multi year lows for a reason, they are losing ground to the wider marketplace and have been for some time. Wizz Air however has managed to carve out a profitable niche in the European short hop market. With the troubles the other carriers have got into the expectation is that there will be more room for them to grow, profitably, and not replicate the old carrier model of grabbing as much coverage as possible on wafer thin margins.
Lloyds are one of the leading stock indicators on the view on the UK economy being the most domestic facing UK bank. Pre Covid levels offer the potential for 100% gains, however in the near term there is still plenty of weight on the price. UK economic data will be a key player in the success of Lloyds from here.
Looking deeper into the entire sector, whether we like it or not bricks and mortar banking is slowly but surely dying off. The Bank of England is already publicly looking at the possibility of a Blockchain pound, within 20 years this is a likely outcome as the digital currency is so much more efficient than a paper one, some analysts suggest the change in the monetary system over the next 20 years will compare to the changes the internet has made over the past 20 years. In this future world what do you need a physical bank for?
Is Lloyds at the forefront of this digital future? not at the moment, so this is an area Lloyds really need to focus on to keep up with the rest.
If the UK economy recovers from the pandemic fully this will certainly gain momentum for Lloyds and buyers could well see pre Covid levels return but at the moment that looks like a task that could take some time and therefore could well create a lot of short term volatility and will more than certainly leave the upside potential stunted.
As hopes continue to grow on the outlook for the UK economy so will the Lloyds share price as we can see below.
But the longer term chart still remains bearish.
Square is an alternative financial stock; they are a US based payments solutions provider. It provides technology and services that among other things allows simple tablets and phones to become payment devices. If you want to know where the money previously invested in the bricks and mortar banks has gone over the past few years simply look at Square’s graph below. Square is powering up towards all-time highs. The Covid pandemic barely created a blip in its weekly chart below. As a result, those looking to see a bounce back in the wider economy on a Covid vaccine would be better placed buying into the future, with Square.
This is another stock that has been under-performing for years, Covid 19 simply hit its operations at an accelerated pace. The graph below is the Weekly graph of Cineworld. The Covid collapse is clear but accounts for less than half of its losses over this period. The splintered nature of today’s audience means that it takes a global event like Avengers Endgame to create a “must-see” event, outside of these true blockbusters cinema chains have quite clearly been suffering for years, is the Covid vaccine news really going to reverse this long term trend? as a result the 40% gains recently could also be a case of too much too soon.
Cineworld's share price has certainly seen a return of the buyers, but after the initial jump up it is now chopping around. You also need to ask yourself the question, how much of that jump was fresh buys and how much was short sellers closing? The longer term chart below certainly highlgihts the problems the shares have seen prior to Covid.
The Weekly graph below is Netflix, you can see graphically here the shift in viewer behaviour with consumers preferring to watch more content from their own home. Is this trend set to continue? All evidence suggests it is. So for the longer term we would be much more interested in investing in Netflix, and just look to short term trade the volatility around Cineworld as despite the recent gains, and the Covid vaccine, Cineworld does not have an especially bright long term outlook, while Netflix continues to go from strength to strength.
So just to wrap, we do not want to rain on anyone's parade, but we do want to flag up that it is easy to get caught up by large moves in certain stocks. It is very important to put moves like this into perspective. Only one question needs to be asked: What was behind these moves?
Did the gains come from a position of strength? or from weakness and based on pure relief?
When applying technical analysis to sharp moves off the lows the trading that follows is critical to understanding if it is indeed a bull trap or the beginning of the turnaround? Will the stock retest the low and form support? Or even break the low and continue lower! or is it the start of the recovery trend and continue to climb?
At the moment it seems as if the market is pricing in a full global roll out of the vaccine and all sectors and industries returning to normal very quickly, but there are still hurdles to climb and still bumps in the road. So, while some of the recent gains make the headlines, we would add an air of caution in pursuing the relief driven stock moves that have already bounced strongly, also pay reference to the longer-term chart and sector. It is also worth noting that not all buying in the market is opening new positions, it could also be the closing of long term large short positions held by institutions, thus giving the impression of huge fresh money moving in when in reality it could just as quickly coming out of bearish positions.
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