Neil's Evening Summary – December 15, 2021 - The Fed Bounce

Neil's Evening Summary – December 15, 2021 - The Fed Bounce

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)

Source abbreviations: BBG = Bloomberg; WSJ = Wall Street Journal; RTRS = Reuters; SA = Seeking Alpha; HR = Heisenberg Report

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My prediction last night for today was for sure we'd see volatility due to options expiration, etc., and I guessed that we'd get a "relief rally" because I saw it hard for the Fed to be more hawkish than expectations. We definitely got the volatility, with stocks moving from solid losses to big gains led by growth stocks. And, despite the Fed trying hard to be more hawkish than expectations, and despite spreading restrictions due to the highly contagious Omicron variant, we also got the "relief rally" part which was chalked up by Bloomberg to "speculation that the Federal Reserve will effectively combat surging prices without choking off economic growth." Whatever the reason, as noted solid gains led by the NDX +2.35%, Naz +2.15%, while RUT and SPX were both up around 1.65%. That gives us gains for every Fed Day this year.

Perhaps the best reason for the rally, though, was just the removal of uncertainty, which, as everyone knows, markets hate. Think we've got a pretty clear picture of the next three months as far as the Fed is concerned absent something major changing.

“While the three rate hikes for ’22 projected by the dot plot likely raised more than a few eyebrows, keep in mind that would still keep us within the realm of historically low rates. The market often moves positively when it has a clearer picture of the future, which the Fed no doubt provided,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial.

Dollar and bonds fell and most commodities rallied with stocks.

Style box shows the clear buying in growth names.

In terms of the Fed, I noted in earlier summaries that a lot of hawkishness was priced in, and the Fed delivered, doubling the pace of tapering, indicating three rate hikes were expected in 2022 (and three more in 2023 and two in 2024) and retiring "transitory" from the statement. The projections for headline and core PCE in 2022 were revised to 2.6% and 2.7% from 2.2% and 2.3% in 2023. Growth expectations were also revised up slightly.

Other than dropping "transitory" other notable changes in the statement were that the unemployment rate has "declined substantially" and "sizeable price increases in some sectors" turned into "elevated levels of inflation". The increased taper was done “in light of inflation developments and the further improvement in the labor market."

On the "dot plot" as noted it showed officials expect three quarter-point increases in the benchmark federal funds rate according to the median estimate. That marks a major shift from the last time forecasts were updated in September, when the committee was evenly split on the need for any rate increases at all in 2022 with nine members saying no. Now, every member expects at least one hike and most - 10 out of 18 - expect three. The interest-rate path was steeper than what analysts had generally seen coming, although it should be noted that three seats will be turned over in the coming year to what will presumably be more dovish members.

The FOMC vote was unanimous. In terms of the press conference, the most notable thing to me is that Chair Powell seemed to move further away from labor market healing towards inflation fighting. He noted that inflation will run above 2% "well into next year." And while it is expected to decline to "closer to 2%" by year end, “we can’t act as though we’re sure of that. We’re not at all sure of that.... Inflation is well above target and growth is well above potential." Then turning to the labor markets he noted that “we’re not going back to the same economy as we had in February of 2020," and clarified that while the labor force participation rate had not bounced back as he had wanted/expected, "we may not have it for some time.... [And] ee have to make policy now and inflation is well above target." He pointed to the quits rate as evidence of labor market tightness. Finally, in terms of the spread between the end of taper and the beginning of rate hikes he said he didn't “foresee an extended wait.”

At one point today, in response Fed Funds Futures were pricing in 90% of a chance of a Fed Hike in April, 50% chance for March.

A few reactions:

“The key question now is the timing of the first hike. If it weren’t for Omicron, we’d expect it in March, but experience elsewhere signals that the U.S. is about to see a massive, unprecedented surge in Covid cases .. We think this will delay the first hike until May ..”” @PantheonMacro

“.. more hawkish than anticipated .. will boost speculation that the Fed could begin raising interest rates as soon as the mid-March mtg. .. but, on balance, we expect that renewed weakness in the economy will convince officials to delay the lift-off date” to June. @CapEconUS

Major Market Technicals

SPX went from a retest of yesterday's lows near the 50-DMA to right back up to the 4700 level. We'll see if it can get through this time. Daily technicals now back to tilting positive (hard to keep up). NDX is similar but remains further below last week's highs and its ATH.

Naz back up to the 20-DMA. Daily technicals remain negative here.

While RUT reversed from its first "real" break of that key trendline from this year to close back over. It remains beneath its downtrend line from the highs (as well as every major moving average). Daily technicals shade negative.

SPX Sector Flag

I wish I had a snapshot of what the SPX sector flag looked like early in the day. What a turnaround Ten of eleven sectors green (only one yesterday) and seven up 1% with two up 2% (tech and health care). Energy was the only sector to finish down around four tenths (but well off the lows).

And we've talked about how BofA's survey showed a big overweight to cash. But even bigger was an overweight to healthcare.

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.

Some improvement particularly in those defensive sectors. All hit ATH's today. Did downgrade energy for now.

- Sectors with good/ok technicals, above most resistance.

XLRE - Real Estate - MACD go long, RSI negative divergence, above all MA's. ATH.

XLP - Staples - MACD go long, RSI neutral, overbought, above all MA's. ATH

XLU - Utilities - MACD go long, RSI neutral, above all MA's. ATH

XLV - Health care - MACD go long, RSI positive, overbought, above all MA's. ATH.

XLB - Materials - MACD go long, RSI neutral, above all MA's.

XLK - Tech - MACD sell longs, RSI negative divergence, above all MA's.

XLI - Industrials - MACD cover shorts, RSI neutral, under 20-DMA.

- Sectors with mediocre to poor technicals but above all/most resistance.

- Sectors that look to have bottomed with positive technicals but below significant resistance.

XLF - Financials - MACD cover shorts, RSI positive divergence, under 50 and 20-DMA's.

XLE - Energy - MACD go short, RSI neutral, under 20 and 50-DMAs. Downgraded today.

XLY - Discretionary - MACD sell longs, RSI negative, below 20-DMAs. On watch for downgrade.

- Sectors regrouping (negative technicals, short-term downtrend, long-term still positive/uptrend).

XLC - Communications - MACD cover shorts, RSI neutral, 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))).

None.

Key Subsectors - SOX (semis), IYT (transp), XBI/IBB (smaller/larger bios (smaller are more a general "tell" on speculative activity as opposed to health care)), XHB (homebuilders), XRT (retail)

All positive today. XBI had an "outside day" up over 4%. Semi's up over 3%. IBB up over 2%, Homebuilders up over 1% and transportation and retail were up nearly 1%.

Breadth

For the point gain, breadth was weak again today, but given most of the day was solidly red, I'm sure that impacted things, so reserving judgment for now. Was four straight days of poor breadth coming into today. On NYSE volume was 58% positive and issues 63%. Naz was 69% positive volume, issues 60%.

Commodities/Currencies/Bonds

Bonds - As noted bonds were sold (yields higher) today with a mild bear steepener (which was a big reversal from right after the statement was released). The steepener was a change from the reaction right after the statement was released when there was a lot of flattening. 2-year yields were up two basis points to 0.69% (0.7% is post-pandemic high), 5-year yields up three basis points to 1.26% (1.38% is post-pandemic high), 10-year yields up three to 1.42% (1.76% is post-pandemic high), and 30-year yields up four to 1.86% which remains towards the low end of the range of this year (low is 1.64%, high was 2.52%). The inversion with the 20-year remained at five basis points (but remains below the high of the year of nine).

Dollar (DXY) - Reversed from just under the year's highs to fall a quarter percent. Remains above the rising 20-DMA. Finished at $96.34. Remains in intermediate-term uptrend. Daily technicals tilt negative.

VIX - Reversed from higher levels to fall back under 20 to 19.29. Normally would say should fall from here but we do have options expiration on Friday and Covid raging.

Crude (/CL) - Reversed from losses to gains along with stocks but remains trapped by the falling 20-DMA and its downtrend line. Running out of space between that and the 200-DMA. I just don't see the catalyst that's going to get it moving to the upside until we get into next year. Finished after-hours at $71.28 WTI. Daily technicals tilt positive now.

Gold (/GC) - Fell out of the range of the last couple of weeks to support before recovering to finish green remaining below resistance. Finished at $1777. Daily technicals are mixed.

Copper (/HG) - After falling beneath its uptrend line from the summer, was able to recover it by the end of the day, finishing right on it. Daily technicals tilt negative.

U.S. Data

Did reports on Retail Sales for November, the NAHB Housing Market Index for December, Import and Export Prices for November, and the Empire State Manufacturing Index for December. Links below.

US Retail Sales (M/M) Nov 0.3% (est 0.8%; prev 1.7%; prevR 1.8%) - After three strong months, some giveback in November retail sales (early Christmas shopping?) - Y/y remains very healthy - Neil's Summary

US Retail Sales (M/M) Nov 0.3% (est 0.8%; prev 1.7%; prevR 1.8%) - After three strong months, some giveback in November retail sales (early Christmas shopping?) - Y/y remains very healthy - Neil's Summary

US NAHB Housing Market Index Nov: 83 (Est 80; Prev 80) - NAHB Builders Survey Improves Further Above Pre-Pandemic Levels Although Off The Highs - Neil's Summary

US NAHB Housing Market Index Nov: 83 (Est 80; Prev 80) - NAHB Builders Survey Improves Further Above Pre-Pandemic Levels Although Off The Highs - Neil's Summary

US Empire Manufacturing Dec 31.9 (est 25.0; prev 30.9) - Empire improves slightly but beats expectations - Neil's Summary

US Empire Manufacturing Dec 31.9 (Est 25.0; Prev 30.9) - Empire Improves Slightly But Beats Expectations - Neil's Summary

November Import prices +0.7% M/M vs. +0.7% est and +1.2% p; Export prices: +1.0% M/M vs. +0.7% est and +1.5% p - Import and export prices decelerate from October but remain elevated - Neil's Summary

November Import Prices +0.7% M/M Vs. +0.7% Est And +1.2% P; Export Prices: +1.0% M/M Vs. +0.7% Est And +1.5% P - Import And Export Prices Decelerate From October But Remain Elevated - Neil's Summary

Next 24

Another big data day tomorrow. In the US, we get weekly Initial and Continuing Claims, Housing Starts and Building Permits for November, Industrial Production and Capacity Utilization for November, the Philadelphia Fed and KC Fed Indexes for December, and the preliminary IHS Markit Manufacturing and Services PMIs for December.

Internationally, we'll get a number of global December flash PMI's as well as Japanese trade and Australian employment for November.

But the highlight will the policy decisions from the Bank of England and ECB. Markets think the BoE will pass on a rate hike. A lot of anticipation for what the ECB does with its asset purchase programs.

And earnings season continues to wind down. SA.

Earnings spotlight: Wednesday, December 15 - REV Group (NYSE:REV) and Lennar (NYSE:LEN).Earnings spotlight: Thursday, December 16 - Accenture (NYSE:ACN), Adobe (NASDAQ:ADBE), Carnival (NYSE:CCL), JAbil (NYSE:JBL), Expensify (EXFY), Rivian Automotive (RIVN) and FedEx (NYSE:FDX).Earnings spotlight: Friday, December 17 - Darden Restaurants (NYSE:DRI) and Winnebago (NYSE:WGO).

Overall

I said yesterday on the path for markets for the rest of the year that "I think it really all depends on the reaction to the Fed meeting tomorrow." Will the rally continue or was this a head fake? I'm inclined to think the former. I really only see Covid as the potential fly in the ointment at this point. The market has so far looked through it, and I think as long as global restrictions don't get too severe, it will continue to do so.

Misc.

Other random stuff.

As repos push back over $1.6T (high of the year was around $1.65T).

As it appears BBB will definitely slide in 2022.

Which has Democrats looking to move other legislation. BBG.

Senate Democrats are preparing for the possibility that passage of President Joe Biden’s roughly $2 trillion economic agenda will get delayed until the new year, as negotiations falter between the White House and West Virginia Senator Joe Manchin, according to people familiar with the negotiations.

Democrats may instead focus on attempting to pass new voting rights legislation and potentially changing Senate rules to accomplish that, according to two other people. One person said there is a chance Senate rules are changed to force lawmakers filibustering a bill to hold the floor and actually talk.

Senate Finance Chairman Ron Wyden said senators have been asking him for “a fix” to ensure checks going out to millions of families continue to do so in January if the Senate doesn’t act.

“I’m going to talk to my colleagues and obviously there are a host of issues you have to resolve,” Wyden said. “You have to get all 50 senators on. But I’ve said for months now that I think the child tax credit is a lifeline for families.”

And Fauci says we don't need an Omicron tailored vaccine. BBG.

Existing booster shots hold up well against the omicron variant of Covid-19 and there’s no need yet to develop specialized vaccines to fight it, federal health officials said.

“Our booster vaccine regimens work against omicron,” said Anthony Fauci, who leads the National Institute of Allergy and Infectious Diseases and serves as a medical adviser to President Joe Biden. “At this point, there is no need for a variant-specific booster.”

Vaccine makers Moderna Inc. and Pfizer Inc.-BioNTech SE have been racing to prepare booster shots targeting omicron. But Fauci, during a briefing for reporters, made the case that specialized shots aren’t needed as he outlined data that show a sharp spike in immune protections after a Moderna or Pfizer booster.

“There is no need to lock down,” Biden’s Covid-19 response coordinator, Jeff Zients, said Wednesday. “We’re going to keep our schools and our businesses open.”

As Covid hospitalizations/cases continue to shoot higher.

And 100M Americans are expected to hit the road this holiday season. BBG.

"The estimate for people planning to drive 50 miles or more between Dec. 23 and Jan. 2 represents a 28% increase from last year, when lockdowns curbed traveling, according to data on auto club AAA’s website. But the number is still 7.3% lower than two years ago."

Air travel is also picking up, with 6.4 million people forecast to fly this holiday season, more than double 2020 levels but still 13% lower than in 2019.

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.