How to make money on the collapse of the us market

World markets react to a correction. From 21 September, when the us stock market reached a local peak, the most affected stocks in South-East Asia and Europe. The best dynamics has shown the Brazilian stock market: the MSCI Brazil index is up more than 14%, although emerging markets as a whole declined by 10%. (Read more here).

Figure 1. The dynamics of country MSCI indices in US dollars from 21 September to 24 October:

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Others not better

After two significant corrections, the yield of the us stock market excluding dividends from the beginning of the year left in a minus, and at the close of the session on Wednesday was approximately minus 0.7% (in U.S. dollars). However, compared to other global markets is not the worst indicator.

The Chinese market has lost 21%, the South African and Turkish — 20%, and emerging markets as a whole dipped by 17.5%. In the segment of developed markets since the beginning of the year, the most affected European — they decreased by 8% (in U.S. dollars).

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As for Russia, the MSCI Russia index since the beginning of the year was down only 1.3%, that is, the Russian market is one of the most sustainable in the world. Worst performance in US dollars among companies from the calculation base indicator show Russian producers of essential consumer goods, which fell by 50%.

Telecommunication companies from the MSCI India lost 43%, Chinese consumer sector companies from the MSCI China, which are not engaged in goods and services of first necessity, fell by 36%, while the Chinese information technology sector represented in the MSCI China by 28%.

While the best dynamics is demonstrated by the following categories presented in the relevant country MSCI indexes: U.S. information technology sector (7%), Indian producers of essential consumer goods and information technology sector (respectively plus 8% and plus 20%) and the Chinese petroleum Corporation (plus 11%). Since the beginning of the year, the MSCI BR/MT increased by 20%, MSCI RUSSIA/ENERGY — 23%, MSCI BR/EN — 24%.

Figure 2. The dynamics of country MSCI indices in US dollars

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Source: Bloomberg, ITI Capital

What to expect and what to buy?

The sharp correction comes as no surprise. In early October, it was clear that the S&P 500 will continue to decline ahead of elections to the U.S. Congress (they held 6 November). Now the nearest support level for the S&P 500 is at 2630 points.

The market looks oversold, it can be clearly seen on the RSI, which is 30 days updated a local minimum in three years. The current value of the coefficient P/E (based on a rolling average level of earnings per share for the last 12 months) is 18.8; for comparison, at the peak of the multiplier achieved is 21.0.

We expect market consolidation at the current levels and rebound of quotations of the most oversold instruments, mainly companies in the information technology sector, which accounted for about 25% of the market. The recovery of prices in the sector should positively influence the market as a whole. Volatility will continue, and further decline will largely depend on the outcome of the elections in the U.S. Congress. A very negative event from the point of view of the market will be the victory of the Democratic party.

With the beginning of the year the most oversold segments of the U.S. stock market is the mining sector (materials, minus 17%), financial services sector (minus 10.3 per cent), industrial (minus 9%) and oil (-8%). Since the beginning of the correction, after peaking on September 21, the most in the information technology sector suffered the suppliers of software and service companies, semiconductor manufacturers and equipment.

Chart 3. The dynamics of the sectors of the S&P 500 relative to the local peak in the period from 21 September to 25 October, %

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The majority (80%) are already reporting companies from the calculation base of the S&P 500 index for the third quarter showed a more positive-than-expected momentum profits. Thus 64% of the issuers provided more positive-than-expected sales figures.

Total profit reporting companies from the S&P 500 index in the third quarter of 2018 grew by 19.5%. If after the completion of the reporting season, the earnings growth of all companies will not be below 19.5%, it will be the best quarterly dynamics of the first quarter of 2011 (when the total profit of the issuers of the S&P 500 index also rose by 19.5%). Modeled for companies from the S&P 500 index over the next 12 months P/E ratio now is 15.9. This is below the average for the last five years (16.3 per), however, exceeds the average for the last 10 years (14.5 mm). The share of companies that gave the market a pleasant surprise, from the standpoint of earnings per share is 80% more than the average for the last five years. Just at the moment the financial statements for the third quarter has already published 17% of the settlement base of index S&P 500.

Analysis according to the principle “from the particular to the General” suggests that the target level of the S&P 500 index currently is 3 259,80 item is 17.7% above the current level (2 768,78 points). Among industry sectors, the biggest growth potential of different extracts (24,6%), in which the difference between the latest closing price and target price the most. Now there are 11 095 recommendations on the securities in the S&P 500 index. In most cases (52,9%) is a recommendation to BUY, 41,5% are guidelines to KEEP and 5.6% on a recommendation to SELL. Speaking of individual industry sectors, the proportion of guidelines to KEEP most of the oil and gas industry (61%), and least of all the producers of essential consumer goods (41%).

Figure 4. Stock portfolio U.S.: promising growth

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