The Factory Daily Letter

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Sentiment has shifted somewhat but there is still a lot of work to do to restore confidence

Since the bottom reached in May, equity indices have experienced a relatively consistent rebound which has been the result of a combination of very oversold technical indicators and extremely pessimistic sentiment, paving the way for a relief rally.

Source: FactSet; Pictet Trading Strategy; as of 7/6/2022.

The recovery cannot be V-shaped like the COVID rally of 2020. Pullbacks must be exploited to benefit from new LT trends.

Despite improving sentiment, investors still face the persistence of negative forces such as inflation fears, more aggressive Fed normalization and the conflict in Ukraine. The road to recovery will be long and rocky, as illustrated by the sometimes-contradictory rhetoric from Fed members on the need for more aggressive monetary policy normalization.

Last week, various hawkish remarks by central bankers fueled skepticism regarding a potential near-term pause in the Fed’s tightening. Speaking on CNBC, Fed Vice Chairman Brainard said that 50 basis point rate hikes in June and July seem to be a reasonable path. However, Brainard also said it was hard to justify a pause in rate hikes in September, saying that if inflation improves, the Fed could go back to 25 basis points.

In addition, the stronger-than-expected ISM report and (to some extent) the U.S. jobs report fueled a renewed sell-off in bonds and led to further weakness in equities, particularly technology stocks. As a result, the 10-year Treasury yields moved above 3% and equity markets suffered another pullback.

S&P500: A test of 4,060 would offer a buying opportunity, in our view.

As we discussed in our Factory Daily letters last week, there are many reasons that lead us to believe that last month's low represents a significant local low and that we may be seeing new positive momentum that could push the index at least towards its 200-day moving average, currently at 4,448.

In our view, the S&P500 has completed a classic zigzag corrective pattern, in which prices tend to follow a 5-3-5 structure, labeled A-B-C. Since the bottom hit in May, the index has rebounded and appears to be forming what may be a first Elliot wave (itself broken down into 5 minor waves). A daily close below 4,140 could push the index towards its next support at 4,062, which would provide an entry point. Then, the bullish momentum could resume and push the index towards the next resistance at 4,300.

Source: FactSet; Pictet Trading Strategy; as of 7/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

The risk/reward is attractive: the resistance zone holds at around 4,300 and the support at around 4,060.

The chart below shows how the index has moved above ST equilibrium prices (Kijun and Tenkan). This positive price action may pave the way for a rise towards the Ichimoku cloud at around 4,275. On the other hand, the Kijun at 4,058 has become a support.

Source: FactSet; Pictet Trading Strategy; as of 7/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

Entering a new phase of the relief rally: Where do new bullish trends form?

The first phase of the rally was characterized by a rebound in the most speculative pockets of the market that had suffered the most during the correction phase. However, their outperformance quickly faded, and investors seem to be repositioning themselves on long-term themes that may emerge stronger if the equity environment improves further.

As it can be seen in the chart below, since the low hit on May 20, divergent fortunes have emerged in terms of style and theme. While high-beta and growth stocks have outperformed quality and value stocks, in terms of theme, the solar industry and Chinese technology names have strongly outperformed.  

Source: FactSet; Pictet Trading Strategy; as of 7/6/2022.

From beta to alpha

As mentioned above, we believe that the relief rally still has potential but given the difficult environment for equities, the road ahead is likely to be bumpy. Pullbacks offer the opportunity to enter new emerging trends and, in this phase of the market, the most important objective for us is to individualise these new trends.

Whereas throughout the post-Covid rally, the most effective way to outperform was to raise beta and trust the Fed, in this new phase of the market, divergences between sectors and themes will become even more pronounced and it will be necessary to individualise the trends as quickly as possible in order to benefit as much as possible from them.

Riding the new trends: solar

Among the trends that seem to be emerging, solar stocks have recently moved above a strong resistance given by the Ichimoku cloud. As shown in the chart below, the price of the Invesco Solar ETF (TAN US) began its consolidation when it reached 120 in early 2021. Then, a negative momentum pushed the price below a series of supports before forming a bullish “double bottom” around 58, in March and May 2022.

Afterwards, positive momentum has resumed, and the price has now broken through an important resistance at 75, the Ichimoku cloud. Furthermore, the lagging line also validated this breakout which could pave the way for a rise towards the prior intermediate top at around 100. A daily close above the declining resistance line linking the highs since 2021 at 83 would validate this bullish scenario.

Source: FactSet; Pictet Trading Strategy; as of 7/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

Solar Stock Screening

The table below lists the stocks in the Invesco solar ETF according to our quantitative screening. We ranked them based on their upside potential, calculated by the distance to the median Bloomberg consensus target price and the distance to their 52-week high.

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 7/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of an

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Please see criteria explanation in the endnotes

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