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Weekly Market Review:
Q2 earnings season began to ramp up this week. With 86 companies (17%) of the S&P 500 having reported, below are the aggregate results relative to recent quarters. While the results below look very strong, it is still relatively early in the reporting season.
Quarter EPS beats Rev beats
Q2 ‘18 94% 78%
Q1 ‘18 81% 74%
Q4 ’17 78% 76%
Q3 ’17 78% 68%
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%
Q4 ‘13 65% 61%
Q3 ‘13 66% 53%
Q2 ‘13 66% 54%
Q1 ‘13 66% 46%
According to FactSet, despite these impressive results, about half the companies that have reported earnings so far have cited the rising dollar as a negative factor in their results. During the second quarter, the dollar rose +5.2% vs. the euro, +6.2% vs. the pound, +9.5% vs. the peso, and +4.3% vs. the yen. If that is true, imagine how strong these results would be without the rising dollar. Below are some of the higher profile companies that reported this week.
Symbol Actual Estimate
BLK 6.62 6.56
BAC 0.64 0.57
NFLX 0.85 0.79
UNH 3.14 3.04
JNJ 2.10 2.07
GS 5.98 4.66
CSX 1.01 0.87
UAL 3.23 3.06
TXN 1.40 1.30
TXT 0.87 0.70
MS 1.25 1.11
ABT 0.73 0.79
IBM 3.08 3.04
AXP 1.84 1.83
EBAY 0.53 0.51
MSFT 1.13 1.08
GE 0.19 0.18
HON 2.12 2.01
Better than expected:
- Industrial Production for Jun: +0.6% vs. +0.5% est
- Weekly (Initial) Jobless Claims: 207k vs. 220k est
- Philadelphia Fed for Jul: 25.7 vs. 22.0 est
- Index of Leading Indicators for Jun: +0.5% vs. +0.4% est
- Retails Sales for Jun: +0.5% vs. +0.5% est
- Business Inventories for May: +0.4% vs. +0.4% est
Worse than expected:
- Capacity Utilization for Jun: 78.0% vs. 78.3% est
- NAHB Housing Market Index for Jul: 68 vs. 69 est
- Housing Starts for Jun: 1173k vs. 1318k est
- Building Permits for Jun: 1273k vs. 1330k est
It was a relatively heavy week for economic data and the results were somewhat mixed. The initial jobless claims are worth mentioning because they came in at the lowest single week level since November 1969. However, single week anomalies can happen, so the more important level is the 4-week moving average, which at 221k is still 7k above the record low set back in mid-May.
This week I’d like to highlight the Capacity Utilization report, which measures actual output relative to the potential output. In other words, it is the percentage of the available production capacity that is actually being utilized in the manufacturing and services process. While the report came in slightly below expectations, as you can see in the Bloomberg chart below, this metric has been steadily improving since November 2016. Since idle capacity is a drain on productivity (i.e. efficiency), the closer to 100% it gets, the better.
Source: Bloomberg L.P.
Past performance is no guarantee of future results.
In last week’s “Outlook” section I stated, “…traders are still buying the dips. Optimism is rising and volatility is down, perhaps because earnings season is here. The SPX appears poised for an upside breakout above 2,798”. On Tuesday the VIX closed at a 6-week low, and midweek the SPX rose 17 points to close above 2,815 before pulling back modestly on Thursday and Friday morning. And while a little consolidation over the next week or so would not be unusual, I am encouraged that the breakout occurred as expected, and I would expect the uptrend to continue after that.
As I said last week, I continue to believe the long-term trend is the most likely trajectory for the remainder of the year and that should result in a new high around the beginning of October and 2018 gains near +10% by year-end. As you can see below, the SPX is now well above the 50-day SMA (yellow line) and the 100-day SMA (red line), and will probably continue to trade near the long-term trend (light blue line) in the coming weeks.
Source: Schwab StreetSmart Edge®
Past performance is no guarantee of future results.
So far in July, aggregate option industry volume is averaging 16.5M contracts per day. That is well below the June level of 19.4M contracts per day and just above the July 2017 level of 16.2M contracts per day.
In reviewing CBOE open interest (OI) data (where greater than 90% of the index activity occurs), I observed the following changes over the past week:
- VIX call OI was -30.7%
- VIX put OI was -37.6%
These sharp declines are due to the July monthly contract expiration on Wednesday (7/18) and are therefore N/A this week.
In reviewing SPX data for the past week I observed the following:
- SPX call OI was +9.3%
- SPX put OI was +7.1%
Since these data are a little biased to the call side, I see them as moderately bullish this week.
In reviewing SPY data for the past week I observed the following:
- SPY call OI was +3.8%
- SPY put OI was +5.5%
Since these data are a little biased to the put side, I see them as moderately bearish this week.
Combining the VIX, SPX and SPY data, I see the Index OI Change as neutral in the near-term. The Equity OI Change shows almost no bias this week, so I see it as neutral in the near-term too.
Index OI Participation is currently -3.5% versus 2017 levels, so I see it as moderately bearish in the long-term.
Equity OI Participation is currently +2.7% versus 2017 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 four ticks to .32 versus .36 last week. At this time, VIX options traders are holding (long or short) 32 puts for every 100 calls. While still well above the YTD low hit back in mid-January, it has now fallen below the 200-day SMA (simple moving average) of .34. While this ratio is down this week and the VIX is little changed, it is likely being exacerbated by the July contract expiration. Therefore I see the VIX OIPCR as still moderately bearish in the very near-term for the markets. I see it as still neutral in the long-term.
This week the SPX OIPCR is down 2 ticks to 1.94 versus 1.96 last week. At this level this ratio has now fallen below the 200-day SMA (simple moving average) of 1.96. Since the SPX has gained a few points this week, this lower ratio probably implies that the market will at least hold its ground or gain slightly next week. Therefore I see the SPX OIPCR as moderately bullish in the near-term for the market. Now about where it was 3 weeks ago, I see it as neutral in the long-term.
The normally very stable Equity OIPCR is unchanged at .95 this week. Once again, this ratio remains near its lowest level in several months, which probably means retail option traders still have a fair amount of optimism. Therefore I see the Equity OIPCR as still moderately bullish in the near-term for the market. It remains moderately bullish in the long-term too.
CBOE Volume Put/Call Ratios (VPCR):
Despite little net change in the VIX this week, the normally volatile CBOE VIX VPCR has moved from neutral to moderately bearish. The .34 reading on Thursday (7/19) was moderately bearish, and the current reading of .25 as I’m writing this (mid-day Friday 7/20) is also moderately bearish. As a result, I see it as moderately bearish in the very near-term.
The CBOE SPX VPCR has been neutral most of the week. The 1.57 reading on Thursday (7/19) was neutral, but the current reading of 1.71 as I’m writing this (mid-day Friday 7/20) is moderately bearish. Since this ratio tends to fall as the day progresses, I see it as neutral in the very near-term. With a 5-day average of 1.55 versus 1.49 last week, it is neutral in the long-term.
The CBOE Equity VPCR has been mostly neutral this week. The .62 reading on Thursday (7/19) was neutral, but the current reading of 0.75 as I’m writing this (mid-day Friday 7/20) is moderately bearish. Since intraday levels on equity options tend to decline as the day progresses, I see it as neutral in the very near-term. With a 5-day moving average of .63 versus .61 last week, it is 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):
The ISEE closed above 100 three out of four times this week. Since this gauge measures only retail opening activity and it is actually a call/put indicator, a level above 100 means that retail option traders on the ISE are trading more calls than puts. Since it closed at 103 yesterday, but the intraday level at the time of this writing is 80, I see the ISEE as neutral in the near-term. Since this ratio has closed above and 100 in 7 of the last 9 sessions, I see the ISEE as moderately bullish in the long-term.
OCC Volume Put/Call Ratios (VPCR)
The OCC Index VPCR has been moderately bearish all week. With yesterday’s close of 1.25 I see it as moderately bearish in the near-term. Additionally, it has been bearish or moderately bearish in all 21 of the last 21 sessions, so I see it as moderately bearish in the long-term.
By contrast, the OCC Equity VPCR has turned from neutral to slightly bullish this week. As a result, I see it as moderately bullish in the near term. Since this is the second week in a row of mostly moderately bullish reads, I see it as now moderately bullish in the long-term.
Cboe Volatility Index (VIX)
Like last week, the VIX has been in a relatively tight range for most of this week. As of Thursday’s close the VIX had increased only about ¼ point from last Friday’s close. At its current level, the VIX is within a few ticks of its long-term statistical mode of about 12.50; which I often refer to as “normal’ volatility. The 20-day historical volatility is 133% this week versus 142% last week. At these levels I see the VIX as moderately bullish in the very near-term for the market. Still very close to its post-February correction lows, I see it as moderately bullish in the long-term too.
On a week-over-week basis, VIX call prices have fallen and VIX put prices have risen. At +83 versus +139 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 neutral in the very near-term. It is neutral in the long-term too. 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 +2.45 versus +2.95 last week. This slightly lower reading is mostly due to the July contract expiration on Wednesday (7/18).
As of this writing (mid-day Friday 7/20), the nearest VIX futures contract (which expires on 7/25) was trading at 13.40, slightly less than a point above the spot VIX level of 12.58. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 13.14, about a half point above the spot price.
With an adjusted level that is only about a half point above the spot price of the VIX, futures traders are indicating that they believe the VIX is unlikely to move up much, early next week. Therefore I see VIX futures as neutral in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 12.85 and 12.86 respectively. With the RPAPs of the further dated contracts both very close to the spot price, 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 still near its long-term mode and the SPX only modestly higher this week, the VIX Hedging Effectiveness is now Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing only some sensitivity to market volatility, and might be only slightly effective as hedging tools in the very near-term. VIX Hedging Effectiveness is Moderate 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.
UK Prime Minister Theresa May is struggling to hold on to her Brexit plans as a 10th member of her conservative party quit on Monday, leaving her with only a 3 vote majority. On a related note, President Trump’s comments last week that a post-Brexit US/UK trade deal was unlikely, were magnified further by his comments this week that he considers the European Union to be a trading “foe” of the U.S. Straining this relationship is a dangerous game as the E.U. is our largest trading partner supporting approximately 2.6 million American jobs.
President Trump met with Russian President Vladimir Putin in Finland on Monday (7/16), and in a joint press conference, criticized our NATO allies, lashed out at American news media, and refused to hold Russia accountable for interfering in the 2016 US elections (though he said this was a misstatement the following day); yet the markets mostly shrugged off the controversy.
Economic reports for next week:
Existing Home Sales for Jun – 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.
New Home Sales for Jun – This report measures sales activity of newly constructed homes and other single family dwellings, and is generally considered less important than building permits since it is more of a trailing report.
Durable Goods Orders for Jun – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.
Weekly Jobless Claims - For the week ending 7/14/18, claims were down 8k to 207k after being down 17k the prior week. The 4-week moving average now stands at 221k, down 2k from the prior week. With this change, the 4-week moving average is now 7k above the 48-year low set on 5/12/18.
GDP for Q2 – This is the first estimate (Advance) for Q2 and the consensus seems to be around +4.0%, which would be a significant increase from the 2.0% level set in Q1.
University of Michigan Consumer Sentiment for Jul – This is the Final report for July. At 97.1, the mid-month report was slightly down from the prior month.
On Tuesday (7/17) and Wednesday (7/18) Fed Chair Jerome Powell provided his semi-annual monetary policy report to Congress and largely stuck with the optimistic view of the economy he has held since he stepped into the role back in February. Some of the key points he covered included the following:
- Interest raise will continue to rise
- Inflation is close to the Fed’s objective and risks are balanced
- The labor force participation continues to improve
- Low wage growth is due to low productivity
- Low productivity can be improved with education and investment
- Tax & trade due present risks but are difficult to predict
- Open trade is good; trade barriers are not
While Powell’s comments boosted equities somewhat, the probability of a rate hike on 8/1 only increased to 18.6% (red box) from 16.5% last week. The probability of a hike by the next press conference meeting 9/26 (yellow box) increased to 89.7% from 84.5% last week. While on Thursday (7/19) President Trump publicly voiced his displeasure with the pace of rate hikes, Chair Powell seems committed to maintaining the independence of the Fed.
Source: Bloomberg L.P.
Past performance is no guarantee of future results.
With the SPX breakout above 2,800, a little consolidation over the next week or so would not be unexpected. I am encouraged that the breakout occurred as expected, and I would expect the uptrend to continue after that.
While I am encouraged by the fact that the SPX broke out above 2,798, I am concerned that it has probably gotten a little too far above the long-term trend in the near-term. Like last week though, volatility is still quite low, Q2 earnings continue to be strong, and traders continue to buy the dips. As you can see below, there were not a lot of changes this week, and those that did change pretty much cancelled each other out. There are still more positive than negative indicators in the Long-Term column, but the Short-Term column is pretty balanced. While the indictors and the technicals are both mostly neutral, the Advance Q2 GDP report on Friday has the potential to move the markets. Therefore the overall outlook for next week is Neutral, but potentially Volatile on Friday.
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.