Neil's Evening Summary – December 8 , 2021 - The Rally Continues For A Third Day
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)
With another day of no major negative headlines, stocks built on their two-day rally, albeit at a less aggressive pace, led again by growth shares, although travel names did well again today also. RUT led today up eight tenths, Naz was up two thirds of a percent, NDX up four tenths, and the SPX up a quarter of a percent.
Style box shows the bias to growth stocks again today.
As Jonathan Golub at Credit Suisse sees 5200 in 2022 for SPX as he raises earnings forecasts by $20. He noted “robust projections for economic growth in both real and nominal terms, further margin upside in cyclical groups, a pickup in buybacks and a favorable discount rate despite Fed tightening.” He also doesn't see any multiple contraction at all nor tax increases. “We believe that tight spreads and low interest rates will support modest valuation upside."
As JPM looks for "return to normal" in 2022.
And Fundstrat says wait to buy the dip.
Major Market Technicals
SPX pushed a little higher and cleared the 4700 level. Old highs are really the only resistance now. Daily technicals remain tilted negative but continue to improve. NDX, and now Naz, look similar.
As RUT made it over the confluence of the 100 and 200 DMA's to the downtrend line of this pullback. Then has 20 and 50 DMA's just above that. So a lot more work to do here. Daily MACD remains negative but do have that positive RSI divergence.
SPX Sector Flag
Weaker SPX sector flag, which is understandable. Still had eight of eleven sectors green, but none up over three quarters of a percent (nine were up over that yesterday I believe). No sector down more than half percent.
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.
More improvement. Upgraded RE and industrials. Tech and staples are very close.
- Sectors with good/ok technicals, above most resistance.
XLRE - Real Estate - MACD go long, RSI negative divergence, above all MA's. ATH. Upgraded today.
XLU - Utilities - MACD go long, RSI neutral, above all MA's.
XLV - Health care - MACD cover shorts, RSI neutral, above all MA's.
XLE - Energy - MACD cover shorts, RSI positive divergence, above all MA's.
- Sectors with mediocre to poor technicals but above all/most resistance.
XLK - Tech - MACD sell longs, RSI negative divergence, above all MA's. On watch for upgrade. All-time closing high
XLY - Discretionary - MACD sell longs, RSI negative divergence, above all MA's. On watch for upgrade.
XLP - Staples - MACD go long, RSI negative divergence, above all MA's. On watch for upgrade.
XLB - Materials - MACD sell longs, RSI negative divergence, above all MA's. On watch for upgrade.
XLI - Industrials - MACD sell longs, RSI positive divergence, above all MA's. Upgraded today. On watch for upgrade.
- 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).
XLF - Financials - MACD sell longs, RSI positive divergence, under 20-DMA. On watch for upgrade.
XLC - Communications - MACD go short, RSI negative, positive divergence, under multiple MA's.
- Sectors in poor shape (negative technicals in intermediate or long term downtrends (so expect further weakness for a while (bear market))).
Key Subsectors - SOX (semis), IYT (transp), XBI/IBB (smaller/larger bios), XHB (homebuilders), XRT (retail)
After a huge day yesterday, XBI did well again today up another 1.4%. IBB also up over 1%. Homebuilders up a half percent. Transp was flat while semi's and retail both fell less than -1%.
Breadth pulled back, which makes sense given the much lower point gain, but remained pretty good. On NYSE volume was 65% positive and issues 59%. Naz was 72% positive volume, issues 63%. Not great but I'll take it.
Bonds - Yields "twisted" today with curve steeping action (short rates fell and longer rates increased). 2-year yields were down two basis points to 0.68% (from a post-pandemic high), 5-year yields up one basis point to 1.27% (1.38% is post-pandemic high), 10-year yields up four to 1.52% (1.76% is post-pandemic high), and 30-year yields were up seven to 1.87% which remains towards the low end of range of this year. The inversion with the 20-year fell to six basis points.
Notwithstanding the fall in shorter rates, the CME FedWatch Tool currently has a 57.8% probability of a rate hike in May 2022, versus 44.1% one week ago.
And we had a sort of weird 10-year note sale today. It had pretty good demand with a higher bid-to-cover and more direct buyers (balance sheet buyers), though it had a little weaker indirect (foreign entities, corporates, individuals, etc.) demand than the previous auction. But it tailed (traded above the when-issued) by nearly a half point.
Dollar (DXY) - Reversed its five day drift higher, falling by nearly a half percent. Testing the 20-DMA area. Finished at $95.94. Remains in intermediate-term uptrend. Daily technicals have turned negative.
VIX - Down again today hitting our target of 20 (and falling below) that I was calling for last week or so. Finished at 19.90. My guess would be it continues to trend down further tomorrow. Friday depends on the CPI report.
And I noted yesterday that the put/call ratio was still elevated (it was over 0.9) despite the rally, which supports Charlie McElligott's view that traders are buying "crash protection" (out of the money puts). This was supported by notes from Goldman and Soc Gen today where they noted that put buying was pushing up the VIX beyond levels that were supported by the actual volatility. This was summed up very nicely today by the Heisenberg Report. The short of it is that people are hedging against a big drop in equities the most since January leading to an elevated VIX.
Goldman’s Rocky Fishman observed that one-month realized has “never been this low with the VIX over 30.” When the closing bell sounded on a second consecutive weekly decline for the S&P last week, the VIX sat at 30 while one-month realized volatility was still just 14%. That 16-point premium, Fishman noted, was 99.7th%ile (figure above).
Further, December 1 and December 3 went down in history. On those days, one-month realized was the lowest ever when the VIX closed above 30. As Goldman’s Fishman went on to say, “the closest historical match to this combination was the lead-up to the January 2021 short squeeze.”
In their latest volatility outlook, SocGen’s Vincent Cassot and Jitesh Kumar wrote that “high demand versus relatively constrained volatility supply continues to particularly impact left-tail risk pricing.” To that point, they updated a poignant chart.
The figure (above) shows “options that are more than 15% lower than the current spot account for a very high percentage of the VIX’s theoretical value,” they went on to say, adding that “this left-tail was especially stretched post [Black Friday’s] selloff.”
This is creating the appearance of extreme risk aversion. I say “appearance” not to suggest that folks aren’t actually risk averse or that risk aversion isn’t warranted. Rather, I want to emphasize how this has become a kind of funhouse mirror.
Fishman captured it well. “As an example of how expensive VIX tail hedges have become, a January 85-strike call, which would only pay off if the VIX closes above its current all-time high, costs the same amount as a 20-strike put,” he wrote, earlier this week. “The VIX has closed below 20 on over 60% of trading days in its history.”
Crude (/CL) - Moved a little higher today to highest close since the huge down day 11/26. Ended after-hours trade at $72.65 WTI. Major resistance is at $74. Daily technicals remain tilted negative but are very close to turning positive.
As EIA (US agency) has their monthly report where they reduced the 2022 oversupply estimate from 0.54mbd to 0.47 as demand was raised by 0.2mbd and production by the difference. Sees Brent at $70 average and WTI at $66.42 in 2022, down $2 from its last estimate.
And IEF (international agency) was out with a report on the energy transition noting that around $525B in Capex will be needed despite the expected fall in demand. A lot of that is to make up for decline rates.
Nat Gas (/NG) - After stabilizing yesterday, pushed higher today up 3% but was rejected by 200-DMA. We'll see if it can push through. Currently at $3.81. Daily technicals remain negative but minor positive RSI divergence.
Gold (/GC) - Ended flat as it remains in a range the last week or so just below resistance. Finished at $1784. Daily technicals tilted negative but has minor RSI positive divergence.
Copper (/HG) - Moved through more layers of resistance today. Now just has the 50-DMA and its short-term downtrend line to get through. Daily technicals have turned positive.
Did report on JOLTS -- Job Openings and the EIA weekly inventories report. Links below.
US JOLTs Job Openings Oct: 11,033K (est 10,469K; prev R 10,602K) - Job openings tick up, quits finally take a breather - Neil's Summary
US DoE Crude Oil Inventories (W/W) 03-Dec: -241K (Est -1521K; Prev -909K) - Small Draw In Crude, 2.5mb Build In All Petroleum Inventories - Neil's Summary
In the US tomorrow we'll get weekly Initial and Continuing Claims report and Wholesale Inventories for October on Thursday. There'll also be a 30-year bond auction.
Internationally, highlights will be Chinese CPI and PPI for November and German trade data.
And earnings season will continue to wrap up. SA.
Earnings spotlight: Friday, December 10: Academy Sports + Outdoors (NASDAQ:ASO).
So yesterday I said I wasn't as confident as I was a few days ago that we would retest the lows from last week, and I remain very unsure. Absent something new derailing things, including a negative turn on the Covid front which I consider the biggest current "black swan" risk, I can really only see two events that have the potential to create heavy selling. One is the CPI report (if it comes in way hotter than expectations), but that is less of a concern to me. The bigger one is the Fed meeting itself. That is one to watch, as we'll get a new summary of projections and dot plot. If that or the statement/press conference is super-hawkish all bets are off.
But other than that, I'm starting to think new highs are the most likely path. We're now likely starting the process of systematic releveraging, corporates are out of the blackout window so can resume their buybacks, and there's the much discussed strong seasonality. Add to that performance chasing, and you could get a pretty decent rally into year-end. As long as Covid or the Fed doesn't spoil the party.
Other random stuff.
Repos remain under $1.5T (high of the year was around $1.65T).
And with respect to my statements above regarding the Fed, Morgan Stanley and Nuveen think it's a bigger risk than Covid. BBG.
Stock investors probably have more important things to worry about than the emergence of the new coronavirus strain, according to Morgan Stanley’s strategists.
While “not that concerned about omicron as a major risk factor for equities,” the strategists led by Michael Wilson see headwinds building elsewhere, after Federal Reserve Chairman Jerome Powell signaled the possible accelerated tapering of asset purchases. “Tapering is tightening for the markets and it will lead to lower valuations like it always does at this stage of any recovery,” the strategists wrote in a note to clients.
Brian Nick of Nuveen, the investment arm of TIAA, with $1.3 trillion in assets under management, also said Monday that “the major risk to our outlook remains a sudden tightening of financial conditions if central banks are forced to respond to inflation driven by an overly tight labor market.” In contrast, most of the economic and market risks associated with the virus “are behind,” according to Nuveen’s outlook for 2022.
Even the usually bullish UBS Global Wealth Management strategists said Monday they “expect a period of heightened volatility ahead as investors attempt to assess the risks from omicron and the Fed, based on insufficient and patchy data.” While they advise investors to refrain from a hasty exit from risk assets, the strategists, led by Mark Haefele, said monetary tightening could present a bear case to their base scenario.
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