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Weekly Market Review:
Aggregate earnings for companies in the S&P 500 are expected to increase in Q3 by about 4% versus Q3 2016. This forecast fell throughout the quarter mostly because Financials were impacted by lower trading revenues (despite being helped by higher interest rates) and Energy companies were impacted by a smaller than expected increase in crude oil prices.
So far only 32 companies (6%) of the S&P 500 have reported, and below are the aggregate results relative to recent quarters.
Quarter EPS beats Rev beats
Q3 ’17 87% 78%
Q2 ‘17 77% 69%
Q1 ’17 78% 63%
Q4 ’16 73% 53%
Q3 ‘16 72% 55%
Q2 ‘16 72% 53%
Q1 ’16 72% 52%
Q4 ’15 68% 46%
Q3 ’15 68% 43%
Q2 ‘15 70% 48%
Q1 ‘15 68% 43%
Q4 ‘14 69% 58%
Q3 ‘14 73% 60%
Q2 ‘14 67% 64%
Q1 ‘14 68% 52%
Below are some of the higher profile companies that reported this past week. Next week’s schedule is significantly larger.
Symbol Actual Estimate
BLK 5.92 5.57
FAST 0.50 0.50
DAL 1.57 1.52
JPM 1.75 1.65
DPZ 1.27 1.22
C 1.42 1.32
PNC 2.16 2.13
BAC 0.48 0.46
WFC 1.04 1.02
Better than expected:
- Weekly Jobless Claims: 243k vs. 254k est
- Core PPI for Sep: +0.4% vs. +0.2% est
- Retail Sales for Sep: +1.6% vs. +1.5% est
- University of Michigan Consumer Sentiment for Oct: 101.1 vs. 95.6 est
- PPI for Sep: +0.4% vs. +0.4% est
- Business Inventories for Aug: +0.7% vs. +0.7% est
Worse than expected:
- NFIB Small Business Optimism Index: 103 vs. 105 est
- CPI for Sep: +0.5% vs. +0.6% est
- Core CPI for Sep: +0.1% vs. +0.2% est
It was a rather light week for economic data and as you can see above, the results were somewhat mixed. One of the biggest surprises to the upside was the 6 point jump in the University of Michigan Consumer Sentiment Index to its highest level since January 2004.
As shown in the chart below, another one of the surprises this week was that while the Core PPI came in above expectations, the Core CPI (dark blue line) remained unchanged at +1.7% y/o/y for the 5th month in a row. This creates an interesting juxtaposition with the downtrend in the Core PCE (yellow line) which is the Feds preferred inflation gauge, and the uptrend in the NY Fed’s UIG (Underlying Inflation Gauge) (light blue line), which has been getting some attention recently. It’s hard to get a real understanding what the true inflation rate is when the different measures are in such disagreement.
Source: Schwab Center for Financial Research
Past performance is no guarantee of future results.
Last week many of the indicators covered in this report showed modest improvement and the Moderately Bullish outlook appears to have been right on target. While the momentum clearly slowed down this past week, the uptrend remained intact enough to register another all-time high in the SPX on Wednesday (10/11), and possibly also by the time you read this report late Friday (10/13).
As I mentioned last week, “while there are a variety of indicators (both technical and otherwise) pointing to near-term overbought conditions, it is important to keep in mind that overbought often becomes even more overbought before it reverses”. I think this accurately describes the current scenario, making it still very difficult to forecast when the next downturn could occur.
Source: StreetSmart Edge®
Past performance is no guarantee of future results.
At about the midway point through October, option volumes are averaging just 15.4M contracts per day. This is well below the September level of 16.8M contracts per day but just above the September 2016 level of 15.1M contracts per day.
In reviewing CBOE open interest (OI) data (where >90% of the index activity occurs), I observed the following changes over the past week:
- VIX call OI was +13.2%
- VIX put OI was +8.3%
These changes show a very clear bias to the call side, so I see them as bearish in the near-term.
In reviewing SPX data for the past week I observed the following:
- SPX call OI was +3.7%
- SPX put OI was +3.7%
These changes show no bias at all this week, so I see them as neutral in the near-term.
In reviewing SPY data for the past week I observed the following:
- SPY call OI was +6.0%
- SPY put OI was +9.2%
These changes show a bias to the put side, so I see them as moderately bearish in the near-term.
Combining the VIX, SPX and SPY data, I see the Index OI Change as moderately bearish in the near-term. The Equity OI Change shows a very slight bias to the put side this week, so I see it as moderately bearish in the near-term.
Index OI Participation is currently +35.3% versus 2016 levels, so I see it as bullish in the long-term.
Equity OI Participation is currently +5.2% versus 2016 levels, so I see it as moderately bullish in the long-term.
Open Interest Put/Call Ratios (OIPCR):
This week the VIX OIPCR is down 1 tick to .26 versus .27 last week. At this time, VIX options traders are holding (long or short) only 26 puts for every 100 calls on the VIX. This ratio is 6 ticks below the 200-day SMA (simple moving average) of .32. This is not too surprising given the VIX has fallen throughout the week and twice closed below 10. This decline therefore implies that participants may be expecting a small VIX uptick in the near-term. At this level however, this ratio is still slightly above where it was for much of Q2, so I see the VIX OIPCR as moderately bearish in the very near-term for the markets. Since this ratio has been falling for 4 weeks now, I see it as still moderately bearish in the long-term.
The SPX OIPCR is up 5 ticks to 2.19 versus 2.14 last week. At this level this ratio is well above the 200-day SMA (simple moving average) of 1.95. The fact that this ratio has up-ticked so much when the weekly net change in the SPX is minimal, indicates growing concern of a pullback. While this ratio is 9 ticks below the 2½ year high it hit 2 weeks ago, I see the SPX OIPCR as moderately bearish in the near-term for the market. Since it remains in a generally rising trend for about 11 weeks now, I see it as moderately bearish in the long-term.
The normally very stable Equity OIPCR is unchanged at 1.06 this week. This ratio is just 3 ticks below its average historical high. This implies that concerns of a downturn are about the same this week as last week, so I see the Equity OIPCR as neutral in the near-term for the market. However, given that this ratio is still relatively high from a historical perspective, I see it as moderately bearish in the long-term.
CBOE Volume Put/Call Ratios (VPCR):
The normally volatile CBOE VIX VPCR has been mostly moderately bearish this week. The .52 reading on Thursday (10/12) was neutral, but the current reading of .36 as I’m writing this (mid-day Friday 10/13), is moderately bearish. Therefore I see it as moderately bearish in the very near-term.
The CBOE SPX VPCR has also been mostly moderately bearish this week. The 1.79 reading on Thursday (10/12) was moderately bearish, but the current reading of 2.13 as I’m writing this (mid-day Friday 10/13) is bearish. Since this ratio does tend to fall as the day progresses, I see it as moderately bearish in the very near-term. With a 5-day average of 1.87 versus 1.36 last week, it is moderately bearish in the long-term.
The CBOE Equity VPCR has been mostly neutral this week. The .70 reading on Thursday (10/12) was neutral but the current reading of .90 as I’m writing this (mid-day Friday 10/13) is moderately bearish. While intraday levels on equity options tend to decline as the day progresses, this is unlikely to drop enough so I see it as moderately bearish in the very near-term. With a 5-day moving average of .66 versus .65 last week, it remains neutral in the long-term.
Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week.
ISE Retail Sentiment Index (ISEE):
This week the ISEE has been mostly in the moderately bearish category finishing below 100 in 3 of the past 4 sessions. Since this gauge measures only retail opening activity and it is actually a call/put indicator, a level below 100 means that retail option traders on the ISE are trading fewer calls than puts. However, given the intraday level at the time of this writing is 125, I see the ISEE as neutral in the near-term. Given recent trends, I see the ISEE as still neutral in the long-term.
OCC Volume Put/Call Ratios (VPCR)
The OCC Index VPCR has moved from neutral to moderately bearish this week. Therefore I see it as moderately bearish in the near-term. However, it has been all over the place over the past few weeks and in a higher volatility environment I would see that as volatile. Instead, since volatility has been so low recently, I see it as neutral in the long-term.
Similarly, the OCC Equity VPCR has also moved from neutral to moderately bearish this week. Therefore I see it as moderately bearish in the near-term. Also like the index ratio, it has been all over the place over the past few weeks, so I see it as neutral in the long-term.
CBOE Volatility Index (VIX)
Since the table I have often displayed in this section is getting a bit too big, I’ll just mention the highlights from now on. With its recent close of 9.91 on Thursday (10/12) the VIX has now closed below ten 31 times this year. There really are only two other periods of time that bear mentioning; the period of late ‘93 to early ‘94, when the VIX closed below ten 5 times, and the period of late ‘06 to early ‘07 when the VIX closed below ten 4 times.
This week the 20-day historical volatility average on the VIX is just 52% versus 59% last week. As of this writing (mid-day Friday 10/13) the VIX is down about half a point around 9.49. At its current level the VIX is less than half a point above its all-time closing low set on 10/5/17. At this level it would be difficult to view the VIX as anything other than bullish in the very near-term for the market. I see it as still moderately bullish in the long-term.
On a week-over-week basis, VIX call prices are down slightly and put prices fairly flat. At +141 versus +169 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is lower, but at this level is still in the range of neutral in the very near-term. Since this gap has been pretty steady over the past 5 weeks, it is neutral in the long-term. Keep in mind, this tends to be one of the earliest indicators I discuss in this blog, and it can also change directions very quickly.
At the moment, the difference between the sum of the 3rd and 4th month futures and the 1st and 2nd month futures is 4.02 versus 3.80 last week. This increase is mostly due to the shorter-term contracts falling more than the long-term contracts.
As of this writing (mid-day Friday 10/13), the nearest VIX futures contract (which expires on 10/18) was trading at 10.24, about ¾ of a point above the spot VIX level of 9.49. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 10.07, still more than half a point above the spot price.
With an adjusted level that is more than half a point above the spot price of the VIX, futures traders are indicating that they believe the VIX could increase slightly in the early part of next week. Therefore I see VIX futures as moderately bearish in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 10.88 and 11.78 respectively. With the RPAPs of the further dated contracts both less than 1½ points above the spot VIX, I see VIX futures as neutral in the long-term for the SPX.
Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.
With the VIX falling throughout most of the week again, VIX Hedging Effectiveness remains Poor in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing very little sensitivity to market volatility, and may not be effective as hedging tools in the very near-term. VIX Hedging Effectiveness is also now Poor in the long-term.
VIX Hedging Effectiveness is a manner of measuring the magnitude of VIX moves relative to the magnitude of SPX moves in the opposite direction. When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.
Like last week, one of the top stories in Europe again is the independence movement in the Catalan region of Spain. The Catalan leader, Carles Puigdemont did not officially declare independence but instead said he was willing to discuss the issue with Spanish President Mariano Rajoy. Notwithstanding the illegality of the effort from the Spanish Government’s perspective or the potential for civil war, it is worth noting that an independent Catalonia would not automatically be part of the European Union, a consequence that could have significant financial ramifications to the region. Despite this temporary pause for negotiations, as I stated last week, “This issue is likely to get even worse before it improves”.
Rhetoric out of North Korea has been relatively subdued this week except for comments from Foreign Minister Ri Yong-ho reiterating that President Trump has effectively “lit the fuse of war against us”. A Bloomberg news story published on Wednesday (10/11) also indicated that North Korea is “preparing to fire multiple short-range rockets” on or around the opening of the Communist party Congress next Wednesday (10/18). Previous displays of this nature have not generally resulted in market pullbacks.
Economic reports for next week:
International Trade (Import & Export Prices) for Sep – This report tracks the prices of goods bought in the US but produced abroad and the prices of goods sold abroad but produced in the US, respectively. Price changes are impacted by inflationary pressures and currency exchange rates.
Industrial Production & Capacity Utilization for Sep – Industrial production measures industrial output as a percentage, relative to output from 2007. Capacity Utilization measures output potential as a percentage, relative to the actual output from 2007.
Housing Starts and Building Permits for Sep – Housing starts measure the beginning of the excavation of the land on which a new single or multi-family residence will be built, and is used as a gauge of housing demand and strength in the construction industry. Building permits are required before excavation can begin, and any changes in permits are often reflected in starts in subsequent months.
Weekly Jobless Claims - For the week ending 10/7/17, claims were down 15k to 243k after being down 14k the prior week. The 4-week moving average now stands at 258k, down 10k from the prior week. With this change, the 4-week moving average is now 24k above the 44-year low hit in late February.
Existing Home Sales for Sep – This is a good measure of overall demand in the housing market, because it aggregates completed closings on all single family dwellings, which comprise the largest portion of the housing market. Home buying can imply economic stability, since it is often the largest single investment for any family. It can also lead trends in future durable goods purchases.
The release of the minutes of the 9/20 FOMC meeting on Wednesday (10/11) had virtually no impact on the probability of a December rate hike, which started out around 77% on Tuesday and remained there through the end of the day Thursday (10/12). However, as shown below, the softer than expected inflation report (CPI) on Friday morning resulted in a small downtick to about 73%.
Source: Bloomberg L.P.
Past performance is no guarantee of future results.
Upside momentum seems to be finally showing some signs of exhaustion, and the indicators say at least a modest pullback or bout of profit-taking is likely in order for next week.
Earnings season really starts to ramp up next week with several bellwether financial, technology, industrial and staples companies scheduled to report. Barring any renewed tensions with North Korea, next week’s market action is likely to be driven mostly by these earnings reports. As shown in the Earnings Recap section above, while the earnings and revenue results versus expectations have been quite good thus far, the market’s reaction to them has been somewhat less enthusiastic.
As you can see below, with the exception of the VIX index (which can change in an instant) the indicators are unusually aligned this week. There is little doubt the market is overdue for at least a modest pullback and with potential for overly optimistic earnings expectations to be met with some selling pressure, the indicators imply that could occur next week.
As a result, the outlook for next week is Moderately Bearish. The overall economic backdrop remains quite strong however, so only a modest uptick in volatility is likely.
Past performance is no guarantee of future results.
OI = Open Interest
OIPCR = Open Interest Put/Call Ratio
VPCR = Volume Put/Call Ratio
IV = Implied Volatility
+ means this indicator has changed in a bullish direction from the prior posting.
– means this indicator has changed in a bearish direction from the prior posting.
+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.