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Is this a big scale “pump and dump” scheme?

By Marius-Cristian Frunza
Weekly Briefs

Industries across the world show double digit contractions in the second quarter, while the stock market exhibits double digit growth. Fama’s efficient market theory for which he received in 2013 the Noble prize points out that in competitive markets, price should function as an information aggregator in order to reflect appropriately the reality. What does it mean for averagely informed risk-takers?

During the roaring 90s, Brooklyn wise guys moved to Wall Street and figured out a scam to manipulate stocks. They were buying penny stocks and spread rumours through retail sellers about those stocks. When there was enough liquidity gathered they were selling their shares at the peak leaving a big number of investors with empty pockets. This scam popularized by Scorsese’s masterpiece “Wolf of Wall Street” seems similar in many ways with what is happening right now on the leading stock markets. The only difference is that those who implement it now speak English with RP and not with a thick Bensonhurst accent.  

A factorial model using valuation related to several markets that were less touched by central banks liquidity inflow show that the Dow Jones should be right now somewhere below 22,000. It should make sense, because economic contraction means less profits and less profits lead to lower share prices.

What to expect for the future? Like in any other situation where money is pumped into a market or drugs are injected into a body, there will be a time for withdrawal and then the symptoms may be less fortunate for some.

There's no denying that he had a point. You see it in jewelry stores all the time: They inflate their price tags and then mark things down right in front of you so you think you're getting a good deal. […] And all this business about an overorder isn't much different than all those stores you see advertising ‘ going-out-of-business sales.’ Most of them have been advertising the same going-out-of-business sale for the last ten years, and in ten more years they'll still be going out of business!
Jordan Belfort, Catching the Wolf of Wall Street: More Incredible True Stories of Fortunes, Schemes, Parties, and Prison

Market overview

S&P500, the leading US stock index flirted this week with its historical maximum reached before the pandemic outbreak.  The promising US unemployment numbers published on Thursday along with the new stimulus and the potential relief bill reinsured the market participants. Nevertheless, the next week is crucial for the stock market and investors may get a prevailing signal whether the market can keep or lose the current momentum.

Interestingly enough, S&P500 has the same value as in February but has not the same meaning for everybody. Back then it was a guarantee for Trump’s re-election, while now is just sealing his short-lived era. Like Led Zeppelin were saying:  you know sometimes words have two meanings.

COVID-19:

Economic impact

New figures show that the British economy contracted by more than 21% year-on-year in the second quarter of 2020. In the global picture, several Asian countries seem to do better than the average, while others experience more significant dips. Vietnam, Indonesia, Taiwan, South Korea and China seemed more resilient to the pandemic impact, while the Philippines, Malaysia and Hong Kong were more fragile. In the European Union, Eastern European countries resisted better than Western and Southern economies.

In this context which country will experience the faster recovery?

Economies that can propose competitive products and services in light of the new circumstances will recover faster. Countries which can devalue their currencies should experience better healing of their economies. Therefore, in the EU, countries from the Eurozone might face harsh times. Companies based in Nordic and Central European countries should be a good prospect for investors looking for growth stocks.

Biotech focus:

Novavax

While it is hard to estimate how many real buyers are interested in the new COVID vaccine produced in Russia, all bets are still on for most of the biotech firms engaged in the race to nail the Chinese bug. While Moderna is putting its sails up, other firms, including Novavax experienced promising results. Phase 1 data of the clinical trials showed that Novavax’s vaccine provides appropriate responses. Moreover, the biotechnology start-up announced last week a deal with a South Korean firm to provide the vaccine to distribute it to the Korean population.

Novavax’s share increased by over 2000% since the beginning of the pandemic, and there could be potential for further growth.

Commodities:

Gold vs Silver

The Gold-Silver spread is currently reducing at a fast pace. But will this change in the near future?

In the years following the previous financial crisis, the silver prices had shown better returns then Gold prices. After 2012 the situation changed. In the current environment where gold price reached a climax last week, one cannot completely rule out the possibility to witness a silver price rally. The bottom line is that investors will start sooner or later to run from the stock market, and they would need to put their monies somewhere. And Silver as a safe harbour is not such a bad option.

Market outlook

After reaching a historical record level last week, the Gold ounce retreated below 2,000 USD, due to technical sales.  But, Gold has potentials for finding a second wind over the following weeks.

Bitcoin moved for a short time above 12,000 USD at the beginning of the week. As predicted in the following days, the leading cryptocurrency floated directionless above 11,500 USD.  Bitcoin may pop again into positive territory toward the beginning of September.

The Dow Jones tested successfully the 28,000 without finding support, and it could test it again next week, subject to the US Senate’s vote for a relief package. Meanwhile, NASDAQ stagnated above 11,000 and should continue its quest for positive momentum until September.


General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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