Brief USA: WTI Turn Inflection for Demand Downturn and more

In this briefing:

  1. WTI Turn Inflection for Demand Downturn
  2. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target
  3. Stocks/Hong Kong/Covid-19/US-China/Jobs
  4. Double Bubble, Double Trouble?
  5. Vertex IPO Preview – A Tax Service SaaS Solution Provider

1. WTI Turn Inflection for Demand Downturn

Wti%20d

Crude Oil (CRUDE OIL COMDTY) rise off the April low with June new highs are are not being confirmed by the RSI for a case of bear divergence as the overlapping price has formed a rising wedge. Wedge patterns have a 70% probability of breaking lower with odds increasing on the back of divergence.

Divergence forms when momentum, buy volume and conviction deteriorate.

As virus cases climb, questions linked to demand will resurface.

42 resistance is a pivotal level; a rejection would set in motion a pullback to test and break the 38 near support and lower wedge level that will open up the downside.

2. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target

Spx%20d

S&P 500 (SPX INDEX) is teetering on a more bullish break point that will define a wave 5 thrust higher or secondary pullback within the summer flat corrective range with support near 2,950.

3,220 and 3,080 will act as key break points for a continued rally or second part of a summer pullback cycle (the later is the favored sequence for a pullback from 3,200).

July cycle peak should align with increased virus cases/concerns and overshadow liquidity over the summer.

ISM, demand and growth data spikes have come off of low bases but due to deteriorate as US re opening faces significant speed bumps.

Macro remains bullish on weakness until liquidly support fades.

3. Stocks/Hong Kong/Covid-19/US-China/Jobs

China News That Matters

  • Bull run in a China shop 
  • State security sets up shop in Hong Kong
  • WHO arrives for crucial, long-delayed investigation
  • Sanctioning the rival superpower
  • New jobs for a new era

In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

4. Double Bubble, Double Trouble?

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A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?

Is this just a double bubble, and does that imply double trouble ahead?

We are not sure. We are torn between Bob Farrell’s Rule No. 4:

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

And Rule No. 7.

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.

Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.

5. Vertex IPO Preview – A Tax Service SaaS Solution Provider

Vertex 5

Vertex (VERX US) is getting ready to complete its IPO in the U.S. market in the coming weeks, trying to raise $100 million. Vertex provides comprehensive tax solutions and its focus has been on providing automated solutions to companies’ indirect tax processes, including sales tax, seller’s use tax, consumer use tax, and value-added tax (“VAT”), among others.

The company’s software is more effective and comprehensive in calculating and automating the indirect tax reporting as compared to numerous other existing enterprise resource planning (ERP) software which was not built for complex tax management. Established in 1978, Vertex has more than 4,000 customers, including over half of the Fortune 500, and provides tax support to its customers in over 130 countries.

Competition – Vertex’s major competitors include Avalara, Thomson Reuters, Davo, Exactor, Walters Kluwer, Sovos, and Tax Jar. Most of its competitors are privately held but a few including Avalara Inc (AVLR US)  are publicly traded. Among the competitors, Vertex will be most closely compared to Avalara which completed its IPO in June 2018 at the stock price of $24 per share and Avalara’s stock price has surged 485% since its IPO. 

The company generated sales of $321.5 million (up 18% YoY) and an operating profit of $31.9 million in 2019, from an operating loss of $2.8 million in 2018. The company had an impairment of assets totaling $32.7 million in 2018. Excluding this amount, it would have had an operating profit of $30 million in 2018. The company had sales of $89.2 million (up 19.6% YoY) in 1Q 2020. However, it had an operating loss of $28.2 million in 1Q 2020, from an operating profit of $7.8 million in 1Q 2019. 

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