Neil's Evening Summary – November 23, 2021 - Testing Support
Seeking Alpha Analyst Since 2013
Managing Partner of Sethi Associates, Ltd., a family owned investment manager specializing in investments in real estate, public markets, and venture capital with a current focus on esports investments. You can view my LinkedIn profile here. https://www.linkedin.com/in/neil-sethi-31204051. Started the blog at the request of friends who wanted an easier way to follow my thoughts on the markets and economic data, and now I share the articles on Seeking Alpha. Feedback always welcome!
Neil's Evening Summary – November 23, 2021 - Testing Support
Please excuse typos. Mornings are tilted more international, evenings more U.S. Continuing to try to make this more digestible for those who are not as familiar with the markets, lingo, etc. Feel free to leave your thoughts in the comments section, they are appreciated. Also, I don't discuss crypto extensively as I don't consider myself knowledgeable enough to talk intelligently on the subject (and there are plenty of other sources for that).
A small glossary. Feel free to inquire about any other terms used.
SPX = S&P 500 Naz = Nasdaq CompositeNDX = Nasdaq 100 (100 largest stocks in the Naz)RUT = Russell 2000 (smaller stocks) DMA = Daily Moving Average (the moving average over the given time period (20, 50, 100, 200 days normally))MACD = Moving Average Convergence Divergence (basically a trend indicator)RSI = Relative Strength Index (basically what it sounds like)
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US equities endued another choppy session with a number of support levels being tested (we'll discuss below) before finishing off the lows (unlike yesterday which saw a selloff into the close). But like yesterday, there was a selloff in growth names as long bond yields moved a little higher today, particularly in the less profitable growth names (those with the longest duration) as we'll discuss in more detail below.
At the end of trading the Naz ended down a half percent, NDX nearly that much, RUT was down -0.15% and SPX actually finished green up just under two tenths.
Style box clearly shows the tilt away from growth again today.
As the combination of extended positioning and the valuation compression from higher discount rates from the recent move in interest rates has crushed the most duration sensitive (i.e., firms with more cash flows further into the future) stocks the past couple of days and has strategists preparing for more pain there. BBG.
As higher rates tend to discount the present value of future profits, tech stocks with the highest valuations tend to suffer most, as witnessed in the Nasdaq 100 Index’s 1.2% drop from record levels on Monday. The tech-heavy index extended losses on Tuesday with a 1.2% decline.
The biggest laggards on the gauge on Monday included three fast-growing yet unprofitable companies Crowdstrike Holdings Inc., Atlassian Corp Plc and DocuSign Inc. All have become richly valued on the back of their growth potential, trading at 23 times to 38 times estimated annual sales. Another of the index’s big fallers on Monday was loss-making Peloton Interactive Inc., even after its stock slumped this year on concern over slowing growth.
That’s bad news for hedge funds who just boosted exposure to high-growth, high-valuation stocks to extreme levels. At the start of the fourth quarter, companies with enterprise value exceeding 10 times sales accounted for a third of their equity holdings, the highest level since at least 2002, according to data from fund filings compiled by Goldman.
Hedge funds might have doubled down on super-growth stocks, seeking to catch up with the market amid favorable year-end trends, according to Michael Purves, founder of Tallbacken Capital Advisors. Thanks to the drag from bearish bets and spotty stock picking, the industry has struggled to keep up with the market, with those tracked by Hedge Fund Research Inc. returning 12% this year. That’s less than half the gain of the S&P 500. With their concentrated bets going awry, fund managers could be forced to unwind the positions as the window for the annual book is quickly closing.
The action could be a preview of what’s to come for some of tech’s highest fliers should interest rates continue to climb, according to Bloomberg Intelligence. The fastest-growing software stocks could see their valuations shrink by more than 20% next year in such a scenario, analysts including Anurag Rana wrote in a research note on Friday.
Goldman Sachs Group Inc. has a similar view: “Avoid fast-growing firms valued entirely on long-term growth expectations, which will be more vulnerable to the risk of rising interest rates or disappointing revenues.” “While many of these high-growth, low-profit companies have attractive outlooks, the dependence of their current valuations on long-term future cash flows makes them particularly vulnerable to the risks of rising interest rates or disappointing revenues."
Strategist David J Kostin prefers companies with dependable profit margins such as Mastercard Inc., Meta Platforms Inc., Autodesk Inc. and Zoom Video Communications Inc. The consensus estimate for Mastercard’s 2023 profit margin is 47%, with the others at around 30%, Kostin said in a note. Their valuations based on 12-month forward sales are also about half as pricey as loss-making tech companies, according to Bloomberg data.
Bank of America Corp. is also wary. Investors can expect a “rates shock” in 2022, strategists led by Michael Hartnett wrote in a note Monday, calling out “the-mother-of-all bubbles” in cryptocurrency and tech stocks.
In that regard, Morgan Stanley noted today that “Crowded Longs (MSXXCRWD) have underperformed NDX by -18% over the last month and -9% over the last week, the second biggest moves on record (trailing only March 2020 price action) and a 6 standard deviation event.” (h/t @GavinSBaker).
And Bespoke notes:
Major Market Technicals
As indicated, all of the indices tested support levels. SPX, Naz, and NDX tested their respective 20-DMAs. SPX and NDX held while the Naz fell below before just recovering by the close. SPX below
Here is Naz.
While RUT came close to 50-DMA (and an uptrend line) before recovering just above that trendline we noted yesterday. Daily technicals on all of the above are negative.
SPX Sector Flag
SPX sector flag improved again today with eight green sectors (six yesterday and three Friday) with three up over one percent (two yesterday, none Friday). Top a mix of cyclicals and defensives again today. Energy continued its bounceback to lead for a second day, followed again by financials with longer rates moving a bit higher today. Large growth sectors took all three of the red spots today, although none was down more than seven tenths..
SPX Sector Technicals Rankings
These are NOT necessarily in the order that I like them for investment but how their underlying technical fundamentals stack up. I do often buy calls though when I upgrade. Going to keep playing with the groupings so bear with me. Started to bold changes.
Upgraded financials and staples today, so charts starting to firm up a bit.
- Sectors with good/ok technicals not stretched/overbought, above most resistance.
XLK - Tech - MACD go long, RSI negative divergence overbought, above all MA's. ATH.
XLY - Discretionary - MACD sell longs, RSI negative divergence, above all MA's.
XLU - Utilities - MACD go long, RSI negative divergence, above all MA's.
XLF - Financials - MACD sell longs, RSI negative divergence, above all MA's. Upgraded today.
XLI - Industrials - MACD sell longs, RSI negative divergence, above all MA's. On watch for downgrade.
XLB - Materials - MACD sell longs, RSI negative divergence, above all MA's.
XLRE - Real Estate - MACD sell longs, RSI negative divergence, above all MA's.On watch for downgrade.
XLV - Health care - MACD sell longs, RSI negative divergence, under 20-DMA. On watch for downgrade.
- Sectors with mediocre to poor technicals but above all/most resistance.
XLP - Staples - MACD sell longs, RSI negative divergence, above all MA's. Upgraded today.
- Sectors that look to have bottomed with positive technicals but below significant resistance.
- Sectors regrouping (negative technicals, short-term downtrend, long-term still positive/uptrend).
XLE - Energy - MACD sell longs, RSI negative divergence, below 20-DMA. On watch for upgrade.
XLC - Communications - MACD go short, RSI neutral, under multiple MA's.
- Sectors in poor shape (and in intermediate or long term downtrends (so expect further weakness for a while)).
None.
Key Subsectors - SOX (semis), IYT (transp), XBI/IBB (smaller/larger bios), XHB (homebuilders), XRT (retail)
Retail only one that moved over 1% (down -1.5%). Transp was mildly green, semi's and IBB mildly red, homebuilders and XBI were right around flat levels.
Breadth
Breadth, which as a reminder had its worst week in a while last week, but was a bit improved yesterday, was mediocre again today. On NYSE volume was 55% positive and issues 45%. Those aren't terrible numbers, but they're the same as yesterday when the losses were worse. Naz was 48% positive volume, issues 40%. Again that's better than yesterday, but the losses were much less today. So at least it's not getting worse, but we're far from "good".
As % of stocks over 50-DMAs has clearly rolled over.
Commodities/Currencies/Bonds
Bonds - Had a bit of a bullish "twist" today with shorter yields falling and longer ones moving higher. 2-year yields, which were up a huge eleven basis points yesterday, fell three to 0.60% (from a post-pandemic high), 5-year yields were flat at 1.33% (also a post-pandemic high), 10-year yields climbed four basis points adding to yesterday's nine to 1.67% (1.76% is post-pandemic high), and 30-year yields were up four basis points to 2.02%. The inversion with the 20-year increased to six basis points.
As 10-year coming up again on the long-term trendline.
Dollar (DXY) - After moving strongly higher last two days finished around flat levels. Ended at $96.50. Remains in short and intermediate-term uptrends. Daily technicals positive but overbought.
VIX - Moved higher today to 19.38 continuing the trend higher (now six days). But today was the first with a red candle. Might mean the end of this up streak.
Crude (/CL) - Well, I said yesterday "a lot of cross-currents today (potential SPR release, potential OPEC+ response, strong dollar, etc.)" but today took that up a notch with actual SPR releases. I will go through that below, but in terms of price action, as we surmised last week, the actual announcement of the release did turn out to be a "sell the news" (or in this case "buy the commodity") event with oil trading down (but staying above yesterday's low) soon after the headlines hit, but from there moving solidly higher finishing up over 2% at $78.56. This puts it right into the underside of its rising 50-DMA. Daily technicals remain negative but now are starting to turn (have a ways to go though).
Here's what I wrote this morning which summarizes what we'd gotten as of around 9 am Eastern. - US announced a 50M SPR release that consisted of a "pull forward" of 18M of already announced sales by a few months. The other 32M is an "exchange" which means they will basically "lend" those barrels to the market but they have to be "paid back" between 2022 and 2024. All of those barrels are scheduled to be moved to the market January - April of 2022. India also announced a release of 5M barrels, which is roughly the same as their daily use. Finally, Japan has said they'll be releasing "several days" worth which would be a decent amount (10-20M?). We'll have to see. Wouldn't be surprised to see crude up later.
It turns out the Japanese release was much less than they initially indicated coming in at around 4.2mb. Also the UK said it would "allow" private companies to release 1.5mb.
In terms of the US release, we also found out it will be of only the less desirable "sour" crude. BBG.
Only sour crude grades are being released, according to the DOE. That matters because sour crudes have fallen out of favor among refiners globally since it requires more processing that typically needs expensive natural gas. If that’s not the kind of crude refiners are looking for, it could end up being stored in oil tanks or exported, meaning it won’t probably have the broader, immediate effect of reducing oil prices at home. Already, a record volume of SPR crude was exported in October.
Which means most of it is likely to end up in China and India who use this "dirtier" oil. BBG.
A large portion of the barrels that will be offered from the U.S. Strategic Petroleum Reserve will likely be exported to China and India, traders said.
That’s because the supplies will consist of sour crude, a type of oil that U.S. refiners are shunning due to its high sulfur content, which makes it more expensive to process. For some foreign buyers, though, U.S. sour crude is attractive because it’s much cheaper than the global Brent benchmark.
The U.S. has already been selling oil from the SPR regularly this year, and a record volume of those barrels was exported in October.
China and India have been actively buying U.S. sour crude produced in the Gulf of Mexico. So, it’s easy to see why New Delhi and Beijing agreed to participate in the coordinated reserves release led by U.S. President Joe Biden.
In terms of OPEC+ response, early indications are that this will not impact their decision Dec 2nd regarding January levels, if only to avoid the chance it is viewed as "retaliation" against these important consuming countries. Argus.
Opec+ ministers will have a chance to discuss what, if any, response is required when they meet on 2 December to set January crude quotas, but several delegates have questioned the wisdom of an immediate policy reaction. "I don't see red flags that may pressure Opec+ to stop its release plan as agreed before," one delegate said.
"Opec+ will act, as always, to keep the market balance," said another delegate, adding that the group will have to analyse whether the SPR volumes will be exported or add to the commercial stocks of the issuing countries. A third delegate said Opec+ remains focused on stabilising prices that encourage new investment in the energy sector and is not aiming to "enter into conflict or competition with anyone".
But we did see more of the backwardation priced out of the market (current prices now closer to future prices). So for what it's worth, all of this drama did serve to wring out a lot of the froth from the market (as we also saw from John Kemp's positioning analysis yesterday).
Finally looks like API is out with builds in crude and gasoline but draw in distillates.
Nat Gas (/NG) - Moved higher today once again pushing up to its short-term downtrend line. Finished at $5.01. Daily technicals remain negative but once again are trying to turn.
Gold (/GC) - After falling sharply yesterday on the rise in real yields, fell further today breaking through the cluster of MA's we noted yesterday (and 1800 level) to an uptrend line back to the summer. It was able to bounce from that, so we'll see. Currently at $1790. Daily technicals have now rolled over to negative.
And it wasn't just gold getting sold off today.
Copper (/HG) - Edged a little higher today to get back into its range of the last few weeks. We'll see if it can continue to move higher through that. In short-term downtrend but intermediate term uptrend. Did get a cover shorts MACD crossover and its RSI is close to a positive divergence.
U.S. Data
Did reports on preliminary IHS Markit Manufacturing and Services PMIs, Richmond Fed Manufacturing Index, and Philly Fed Nonmanufacturing Business Outlook Survey all for November. Links below.
Philadelphia Fed Non-Manufacturing Regional Business Activity Index Nov: 46.1 (Prev 33.4) - Philly Fed Services Improves Again - Neil's Summary
US Markit Composite PMI: 56.5 (Prev 57.6) - Services Pull Down Composite Index, But PMI's Remain Well Into Expansion Territory - Neil's Summary
US Richmond Fed Manufacturing Index Nov: 11 (est 11; prev 12) - Fifth District Mfg Index Comes In As Expected In Expansion Territory - Neil's Summary
Next 24
Massive batch of economic data tomorrow in the US to get you ready for the holiday on Thursday. We'll receive weekly Initial Claims and EIA reports, Personal Income and Spending and PCE prices for October, New Home Sales for October, second read on 3QGDP, durable goods orders for October, and the final University of Michigan Index of Consumer Sentiment for November.
Internationally some highlights are Japanese PMI's, RBNZ rate decision, German Ifo business sentiment, and UK industrial orders.
And earnings season will continue to wind down. We're past most all of the heavyweights at this point but still have some notables this week.
Overall
As you know, at the start of earnings season I changed my "roadmap" to a focus on earnings season which has often seen weakness sometime within the first couple of weeks. Here's that chart showing the earnings season starts over the past year (arrows indicate the start). That dashed line is 2020/2021, so first arrow is last October's earnings season. I said I would leave it up as we move through the season, so I continue to (against my better judgment probably), but at this point it's pretty clear using the prior seasons as a roadmap of any kind was not the right call. The season officially has another week or so. I look forward to not having to post this. But I'd be remiss if I didn't note that we've also seen dips at the very tail end of earnings.
Last week I reiterated my "main" message - "Looking forward, the set up seems to be favorable with great seasonals, decent breadth, improving weekly charts, and continued abundant liquidity. Ever frothier sentiment, stretched positioning, and mediocre technical conditions on many shorter term charts are headwinds, and they do mean we have to watch for dips, but at this point the setup seems to remain in the bulls' favor. The price action for now is saying look higher, with dips meant to be bought."
I added the caveat to that of breadth last Wednesday, and that continued to deteriorate from there, but it seems to be improving a little last couple of days. But it remains an issue at this point. We also still have a lot of issues in the technical conditions of both the index and many sector charts, but, again, some of those are also improving. So while I continue to think the chances are not bad for some sort of buyable pullback in the not too distant future (or at least further chop), we've gotten some of the froth wrong out (see the non-profitable stocks, and the put/call ratio was up above 0.8 today). And with the strongest of seasonality about to kick in, I am pretty sure I wouldn't want to be short this market.
Misc.
Other random stuff.
Repos remain over $1.5T (but below $1.65T high water mark).
And mentioned this morning that call volumes are pushing up to new notional highs. Over half of that is TSLA and AMZN.
To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to Cbus Neil's Blog Posts for more recent or Sethi Associates for the full history.
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