Neil's Evening Summary – December 3, 2021 - A Lot To Digest
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)
Also, on my charts, the lines are 20-DMA (green), 21-DEMA (red), 50-DMA (purple), 100-DMA (BLUE), 200-DMA (brown)
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The stock and bond markets whipped around today as they tried to put a "confusing" jobs report and scorching hot ISM services PMI into the context of a newly more hawkish Fed and falling commodity prices. Throw in investors looking to protect year-to-date profits and the "realizing up" of trailing volatility adding selling pressure from systematic traders, and you ended up with a mess for lack of a better word.
The day started out sort of "normal" with global stocks seemingly undecided about a direction ahead of the jobs reports in the US. Once the the employer's survey (which showed a big headline miss on the job gain) was released, the immediate reaction was akin to a sigh of relief ("ok, great, the Fed doesn't have to be as aggressive now") - a drop in shorter bond yields and jump in stocks. But in a classic "fade the first move" scenario, as analysts parsed the actual data, they found a lot for the Fed to like. The household survey showed very strong job growth, the participation rate increased, absent seasonal adjustments the employer's report was stronger than it first appeared, etc., etc.
And so just after the open, we saw a huge reversal with shorter term bonds and stocks falling together (and short yields moving towards the highs of the year). But for whatever reason (nothing is obvious to me), traders bought the move in bond yields pushing them back down. Stocks attempted to rally on that, and made it off the lows but that was about it. Growth stocks in particular couldn't get off the mat despite the pullback in yields. Below is the chart from the SPX today.
In the end, it was pretty ugly with the RUT down just over two percent, the Naz and NDX down almost two percent and the SPX down around nine tenths.
Style box shows growth getting sold.
Here were some comments from a BBG article on the action today.
- “Today’s non-farm payroll report looks ‘messy’ to me. Best to wait for the revisions next month before sounding the stagflation alarm too loudly. And, if you think this report will push back the accelerated taper mentioned by Fed Chairman Jerome Powell this week, you would be mistaken,” said Jamie Cox, managing partner for Harris Financial Group.
- “The economy is strong, but the labor market is reaching its full potential, and inflationary forces are already elevated, which is why the Fed is feeling more urgency to complete their tapering early,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
- “This is a reminder of the uncertainty on the pace of the jobs recovery. It will give the Federal Reserve pause as it considers accelerating its monetary policy tightening. A slower pace would be welcomed by markets,” said Ben Laidler, global markets strategist at multi-asset investment platform eToro.
As BofA’s Savita Subramanian says the risk of a correction is now "elevated" (not sure that's news). BBG.
The Federal Reserve’s march toward higher rates presents greater risk for stock investors, and the likelihood of a correction in the S&P 500 next year is “elevated,” says BofA’s Savita Subramanian.
“We are in an environment where the dividend yield on the S&P 500 is below where cash yields are likely to be in a year or two,” BofA Securities Inc.’s head of U.S. equity & quantitative strategy said in an interview on Bloomberg TV’s Surveillance on Friday. “Our economists are forecasting eight hikes over the next couple of years.”
Investors should own companies that can weather higher rates and market volatility, “but you don’t necessarily want to own the entire S&P 500,” she said. “I do think the probability of a 10% correction in the near term or over the next 12 months is elevated.”
To be sure, the BofA strategist says she doesn’t “want to sound too alarmist,” and expects stock indexes will be able to avoid losses. “Our market forecast is flat,” she said. “It is going to be a tough grind.”
In a Nov. 23 research note, Subramanian forecast the S&P 500 Index to be at 4,600 at the end of 2022, up slightly from yesterday’s close but down more than 100 points from a high reached in November before the omicron variant of the coronavirus emerged, disrupting global markets. In the note, she recommended energy, health-care and financial shares and to avoid consumer stocks.
“This reminds me of 2000, when we all accepted a negative equity risk premium as normal,” she said. “This is not normal. Negative real rates are abnormal, and I think they’re telling us that something is essentially wrong.”
The higher interest rates that are coming will show that “the bubble right now is not in stocks,” Subramanian said. “It’s in bonds.”
And at least somebody was buying today.
Major Market Technicals
SPX, which had recovered some key levels - 4545 and 50-DMA, fell beneath both but was able to bounce off the 100-DMA. Still not a great setup for next week. Daily technicals remain negative. Weekly are now negative as well. Monthly remain positive but are flattening. NDX and Naz look similar except Naz actually fell under its 100-DMA before reclaiming it.
As RUT is right back testing that major support line which held again. Daily technicals remain solidly negative but does have positive RSI divergence. Weekly technicals are negative, and the monthly are very close to turning negative.
SPX Sector Flag
SPX sector flag at least had a few green sectors today (all defensives). Two were actually up over 1%. Three sectors down over -1% which were two big cap growth sectors and financials on the yield curve flattening.
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.
Downgraded tech so now all are in the worst non-bear market category. Looking at weekly technicals, materials, tech, and energy still slightly positive. Looking at monthly looks a little better with all sectors positive other than comm's.
- Sectors with good/ok technicals not stretched/overbought, above most resistance.
- Sectors with mediocre to poor technicals but above all/most resistance.
- 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).
XLU - Utilities - MACD sell longs, RSI negative divergence, above all MA's. On watch for upgrade.
XLK - Tech - MACD sell longs, RSI negative divergence, under 20-DMA. Downgraded today.
XLY - Discretionary - MACD sell longs, RSI negative divergence, under 20-DMA.
XLRE - Real Estate - MACD sell longs, RSI negative divergence, under 20-DMA.
XLV - Health care - MACD sell longs, RSI negative divergence, under multiple MA's.
XLP - Staples - MACD sell longs, RSI negative divergence, under 20-DMA.
XLB - Materials - MACD sell longs, RSI negative divergence, under 20-DMA.
XLE - Energy - MACD sell longs, RSI negative divergence, under multiple MA's.
XLF - Financials - MACD sell longs, RSI positive divergence, under multiple MA's.
XLI - Industrials - MACD sell longs, RSI positive divergence, under multiple MA's.
XLC - Communications - MACD go short, RSI negative, very oversold, under multiple MA's. On watch for downgrade.
- Sectors in poor shape (negative technicals in intermediate or long term downtrends (so expect further weakness for a while (bear market))).
None.
Key Subsectors - SOX (semis), IYT (transp), XBI/IBB (smaller/larger bios), XHB (homebuilders), XRT (retail)
All red today (although semi's were almost flat for a second day). XBI big loser down over -4%. IBB and XRT down almost -2%. IYT and XHB mildly red.
Breadth
After we finally got a decent breadth day, back into the soup today. On NYSE volume was 26% positive and issues 24%. Naz was 23% positive volume, issues 22%. So outside of yesterday, breadth was weak all week.
Commodities/Currencies/Bonds
Bonds - As noted, more curve flattening today in a bullish flattener (longer yields falling more than shorter ones). 2-year yields fell three basis points to 0.60%, 5-year yields down eight to 1.3%, 10-year yields down nine to 1.35%, and 30-year yields were down seven to 1.69% which remains the lowest since early January. The inversion with the 20-year fell to eight basis points.
This saw the 10-year yield break the uptrend that dates back to August 2020.
Dollar (DXY) - Ended up finishing flat. Did trade up again today a bit. Finished at $96.14. Remains in intermediate-term uptrend. Daily technicals mixed. Monthly are positive.
VIX - Yup, hit a new post-January high. I'm officially done calling the top on this. Finished at 30.67
Crude (/CL) - Tried to move higher but ended up falling back. With the huge move down, could take a while for systematic strategies to "catch up" to realized volatility (i.e., for the selling the finalize). Also it looks like a lot of traders are closing down if the BBG story below is right. Finished at $66.22 WTI. Daily technicals remain mixed with a very negative MACD but a positive RSI divergence. Monthly technicals tilt positive still.
As rig count stayed dead flat this week.
And I noted earlier this week that the selling through Wednesday would be interesting given the selling through the Wednesday before Thanksgiving was already quite heavy, and it did show a decrease of around 15% in net length. We'll get a more full update hopefully from John Kemp next week.
Brent was even more aggressive with net length pared by over 20%.
And here's that BBG story.
Oil traders and investors are shutting down their books at a rapid pace, after a remarkable period of year-end volatility.
Combined open interest in four Brent and West Texas Intermediate contracts, alongside the primary gasoline and diesel futures has plummeted to its lowest level since July 2016, according to exchange data compiled by Bloomberg. Almost a million futures contracts -- equivalent more than 850 million barrels of oil and fuel -- have been liquidated since prices neared multiyear highs in mid-October.
The decline has accelerated in recent days, after crude last Friday shed $10 in a single day, and has whipsawed again throughout this week. Those moves have pushed market volatility to its highest since prices went negative last year, and to some of the highest levels ever.
Investors “don’t want to go on holiday and come back and oil is down 30%, this is just too high octane,” Christyan Malek, head of EMEA oil and gas research at JPMorgan Chase & Co. said in a Bloomberg TV interview. As a result the market is currently stuck in a “kind of paralysis,” he said.
Previous bouts of extreme volatility have led to collapses in activity. When prices turned negative in April last year, trading volumes collapsed in the months that followed as some traders shied away from the risks of holding a contract that could go below zero.
Nat Gas (/NG) - Continues to try to stabilize at the $4 mark. Finished up around a percent. Ended at $4.09. Daily technicals remain negative. Monthly tilt positive.
Gold (/GC) - Up a percent or so today to $1783 but into resistance. Daily technicals remain negative as do monthly.
Copper (/HG) - Again tried to push through resistance and failed finishing down. Daily technicals remain negative. Monthly are positive for now.
U.S. Data
Did reports on Employment Situation Report (and Household Employment Report) for November, the ISM Non-Manufacturing Index for November, Factory Orders for October, and the final IHS Markit Services PMI for November. Links below.
US Non-Farm Payrolls Nov: 210K (est 550K; prev 531K) - Big miss on the headline number, but some good news if you dig deeper - Neil's Summary
US ISM Services Index Nov: 69.1 (est 65.0; prev 66.7) - ISM services continue to push into record territory - Neil's Summary
US Markit Services PMI Nov F: 58.0 (est 57.0; prev 57.0) - Markit Services report moves up from the preliminary reading staying solidly in expansion territory - Neil's Summary
US Factory Orders Oct: 1.0% (est 0.5%; prev 0.2%) - Manufacturing orders up solidly in October as is core capital spending - Neil's Summary
Next Week
A little lighter week next week, but it ends with an important report with November CPI this will be digested by the Fed ahead of its meeting the following week. We'll also get the preliminary December consumer confidence from UofM and the inflation expectations will also make headlines I'm sure.
Internationally, central banks of Canada and Australia will meet.
And earnings season will start to wrap up.
Overall
As you know, at the start of earnings season I changed my "roadmap" to a focus on the previous four earnings seasons which had seen weakness sometime within the first couple of weeks and/or at the very end. Below is 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 3Q20 earnings season. I said I would leave it up as we move through the season, so I continue to (we're just about done now), but it's pretty clear using the prior seasons as a roadmap of any kind was not the right call at least up until now. But I have noted last week or so that the very end of earnings season often has seen some weakness as well, so I guess that part is playing out. I said last Friday I think this dip may look like those other ones (circled) when it's all said and done, and that's still my base case.
As I noted earlier this week, though, it could be a bit of a process to find that bottom especially with the continued volatility putting selling pressure on from systematic strategies. But I think as long as we stay above the lows of this week, we should not see increased selling pressure from trend followers.
As an added complication, of course, the market clearly needs some time to digest the new Fed stance as well as the consequence of the new Covid variant. That in and of itself will likely create some volatility. And the charts have deteriorated further, with a lot of resistance to work through. Failing at it this week doesn't make that any easier.
So I think for now the most likely course is some chop as we test upside and downside levels. But the market remains oversold, and we continue to see caution creep into the market with the put/call ratio today hitting 1.17, the highest since last year I believe. Plus all the selling has created a lot of available buying power, and seasonality remains strong, so if the market can get some traction, we could be testing the highs before we know it.
Misc.
Other random stuff.
Repos back under $1.5T.
As latest Iran talks were ended by the US and allies "because Iran right now does not seem to be serious about doing what is necessary to return to compliance with a 2015 deal."
WASHINGTON, Dec 3 (Reuters) - U.S. Secretary of State Antony Blinken on Friday said that the latest round of Iran nuclear talks ended because Iran right now does not seem to be serious about doing what is necessary to return to compliance with a 2015 deal.
Blinken, speaking at the Reuters Next conference, said that the United States would not let Iran drag out the process while continuing to advance its program and that Washington will pursue other options if diplomacy fails.
"What we've seen in the last couple of days is that Iran right now does not seem to be serious about doing what's necessary to return to compliance, which is why we ended this round of talks in Vienna," Blinken said. read more
"We're going to be consulting very closely and carefully with all of our partners in the process itself ... and we will see if Iran has any interest in engaging seriously," he said.
Indirect U.S.-Iranian talks on saving the nuclear deal broke off until next week as European officials voiced dismay on Friday at the demands of Iran's new, hardline administration.
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.