Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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Nasdaq 100 pattern suggests rebound; what happened to Slack?
Peter Garnry
Chief Investment Strategist
Summary: The three-week price action ending last Friday has happened before and if history is any guidance then the two-week future returns are positively skewed and significantly above the long-term drift in Nasdaq 100 futures. We also point out more soft indicators such as call option volume in Apple and Tesla suggesting risk appetite is intact although at a lower level compared against the previous weeks. We also look at Slack which saw its shares plunge 14% yesterday on disappointing billings although our view is that this phenomenon is only temporary.
The rebound in Nasdaq 100 futures is under way although there is a lot of wood to be chopped before getting back to the highs. Yesterday’s session saw a 4.2% move from intraday lows to the close in the future and today US technology stocks are nervously higher although not by much. As we alluded to earlier this week it would be interesting to observe the willingness to buy the dips and whether US retail investors would aggressively participate and especially in call options again after last week’s implosion of weekly call options. So far call option volume remains high across stocks such as Apple and Tesla but still down from the record levels in the weeks prior to the sell-off. It indicates that the rebound has some fuel.
Previous similar price action in Nasdaq 100 suggests rebound
Statistical analysis in financial markets is a fickle thing but when you observe a move like the past week it poses questions. We created 21 features on the Nasdaq 100 futures over a three-week running period ranging across price actions indicators. We then used a method called dynamic time warping to match the recent three-week price action period in the Nasdaq 100 futures with history going back to July 2000. In other words, we were looking for previous periods that were like this recent period from 14 August to 4 September (last Friday). We then isolated the 40 most similar periods and calculated their forward 2-week return.
The histogram below shows the distribution of those 2-week forward returns. It has a negative skewness, but the large negative return is the 2-week forward return from the 21 February 2020 starting point, so just ahead of the COVID-19 declines. If we remove this observation, which is arguably driven by a once-in-century event, the skewness becomes positive with an average 2-week forward return of 1.6% compared the historical average 2-week return of 0.3%. The technical price action setup thus suggests a rebound in Nasdaq 100 futures, but remember past performance is no indication of future performance. Slack Technologies was down 14% yesterday on its earnings report despite revenue beating estimates and negative effects from the pandemic are slowly disappearing. The fiscal year guidance on revenue was also above the consensus estimate. However, Wall Street zoomed in on the Q2 billings that came in at $218mn against estimates of $233mn indicating a growth slowdown. Slack was one of the most anticipated IPOs of 2019 and has so far failed to live up to the hype with the stock down 32% since the IPO. Given the labour market indicators dynamics over the past couple of months we believe the billings will stage a comeback over the coming quarters surprising analysts.
Despite the negative sentiment due to the disappointing billings the quarter was still the best in the company’s history with cash flow from operations rising to $14.5mn and free cash flow hitting $10.8mn. The current trajectory indicates that the company will continue to grow revenue by around 30% per year. However, the competition is heating up with especially Microsoft going aggressively after Slack’s business.
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