Weekly Trader's Outlook

May 13, 2022 Randy Frederick
Bargain hunters still being thwarted.

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Weekly Market Review

Earnings Summary

The regular Q1 earnings season is winding down now. This week, 21 S&P 500 companies reported Q1 earnings and 11 of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 455 (91%) of the companies in the S&P 500 have reported Q1 results. Below are the aggregate beat rates relative to the final results from recent quarters.

Earnings Summary

Quarter       EPS beats  Rev beats
Q1 '22 76% 67%
Q4 '21 76% 69%
Q3 '21 82% 68%
Q2 '21 86% 83%
Q1 '21 87% 72%
Q4 '20 78% 69%
Q3 '20 84% 74%
Q2 '20 85% 65%
Q1 '20 65% 59%
Q4 '19 74% 64%
Q3 '19 78% 58%
Q3 '19 76% 56%
Q3 '19 77% 57%
Q4 '18 73% 60%
Q3 '18 82% 61%
Q3 '18 84% 72%
Q1 '18 81% 74%
Average 79% 66%

From a growth standpoint, Q1 earnings are +10.0% y/o/y so far versus a +5% estimate when the quarter ended. Q1 revenue is +14.2% y/o/y versus a +11% estimate when the quarter ended. This compares to actual growth of +29.6% and +15.9% respectively in all of Q4.

Economics Recap

Better (or higher) than expected:

  • NFIB Small Business Optimism Index for Apr: 93.2 vs. 92.9 est
  • Treasury Budget for Apr: $308.0B vs. $260.0B est
  • Core PPI for Apr: +0.4% vs. +0.7% est
  • Import Prices for April: 0.0% vs. +0.6% est

On Target:

  • Wholesale Inventories for Mar: +2.3% vs. +2.3% est
  • Producer Price Index (PPI) for Apr: +0.5% vs. +0.5% est

Worse (or lower) than expected:

  • Consumer Price Index (CPI) for Apr: +0.3% vs. +0.2% est
  • Core CPI for Apr: +0.6% vs. +0.4% est
  • Initial (weekly) Jobless Claims: 203k vs. 193k est
  • Export Prices for April: 0.6% vs. +0.7% est
  • University of Michigan Consumer Sentiment (prelim) for May: 59.1 vs. 64.0 est

This was a busy week for economic data and the reports came in rather mixed. At +11.0%, the April Producer Price Index (PPI) fell slightly from 11.5% in March though it remains very high. At +8.3%, the Consumer Price Index (CPI) also fell slightly from +8.5% in March. While everyone is looking for signs of peak inflation, we’ll need at least another month or two to know for sure. As you can see in the 1-year chart below, April was the first noticeable dip in both the y/o/y PPI (orange line) and the y/o/y CPI (white line).

pic1

 Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Market Performance YTD

The 42% YTD rise in West Texas Intermediate Crude (WTI) prices continues to support the enormous divergence in sector performance YTD. Once again, Energy is the only positive sector YTD.

Here is the 2022 YTD (versus 2021 full-year) performance of the market broken down by the 11 market sectors (as of the close on 5/12/22):

2022 YTD performance of the market broken down by the 11 market sectors

2022 YTD    2021 Final    Category
1. Energy              +40.1% +47.7% Defensive
2. Utilities  -1.7% +14.0% Defensive
3. Cons Staples -1.7% +15.6% Defensive
4. Healthcare -9.9% +25.0% Defensive
5. Materials -10.5% +24.2% Cyclical
6. Industrials -13.2%  +19.4% Cyclical
7. Financials  -15.6% +32.5% Cyclical
8. Real Estate -19.1%  +42.5% Cyclical
9. Info Tech -24.9% +33.4% Cyclical
10. Communications Svc -27.1% +23.7% Defensive
11. Consumer Disc -29.2% +20.5% Cyclical

Here is the 2022 YTD (versus 2021 full-year) performance of the major U.S. equity indices (as of the close on 5/5/22):

2022 YTD performance of the major U.S. equity indices

 2022 YTD 2021 Final Forward P/E Ratio
S&P 500 (SPX)    -17.5% +26.9% 17.2
Nasdaq Composite (COMPX) -27.3% +21.4% 23.8
Dow Industrials (DJI) -12.6% +18.7%  16.6
Russell 2000 (RUT) -22.5% +13.7% 18.9

Technicals

Last week I stated, “…volatility is likely to overshadow any gains that may occur”. With a top-to-bottom range in the SPX of more than 100 points during each of the first 4 days and the VIX above 30 in each of those days, I think it’s safe to say that statement was on target. Thus the primary outlook of “Volatile” hit the mark. However, I also expected a “Moderately Bullish” result by the end of the week, which (barring a +135 point gain on Friday) didn’t happen; though it wasn’t for a lack of trying. During each of the first 4 days, the SPX moved higher in the morning, only to be sold off in the afternoon. Try as they might, dip buyers persist but continue to get punished.

As you can see below, not only did the SPX break support (3,950) on Wednesday (5/11), it also got dangerously close (22 points) to the bear market threshold (3,836) on Thursday afternoon (5/12). A broad-based bear market is still not a certainty, but there is very little technical support above that level.

pic2

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

The tech-heavy Nasdaq Composite ($COMPX) continues to suffer even more. As you can see below, since falling solidly into a bear market on Thursday (5/5) the COMPX deteriorated further this week, eventually reaching -30.8% from its bull-market high. The next level of support may not appear until the November 2020 lows (10,822).

pic3

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes

As we approach mid-month, May option volume is averaging a very solid 41.9M contracts per day. That is above the final April level of 39.1M, and above the May 2021 level of 36.1M contracts per day. The all-time record of 45.2M contracts per day was set in November 2021.

Open Interest

OI Change

The following data comes from the Chicago Board Options Exchange (Cboe) where about 98% of all index options, about 20% of all Exchange Traded Product (ETP) options, and about 15% of all equity options are traded:

In reviewing the VIX OI Change for the past week I observed the following:

  • VIX call OI was +4.2%              
  • VIX put OI was +10.4%             

Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These changes reflect a solid bias toward the put side, so I see the VIX OI Change as bullish for the market in the near-term.      

In reviewing the SPX OI Change for the past week I observed the following:

  • SPX call OI was +2.4%
  • SPX put OI was -1.4%              

While SPX volume tends to be mostly institutional hedging, these changes reflect a small bias toward the call side, so I see the SPX OI Change as moderately bullish for the market in the near-term.

In reviewing the ETP OI change (which includes SPY, QQQ, DIA & IWM) for the past week I observed the following:

  • ETP call OI was +5.8%             
  • ETP put OI was +3.2%            

The aggregate changes in Exchange Traded Products options reflect a small bias toward the call side, so I see the ETP OI Change as moderately bullish for the market in the near-term.

In reviewing the Equity OI Change for the past week I observed the following:

  • Equity call OI was +2.6%                      
  • Equity put OI was +1.7%                       

Equity volume tends to have a large retail component to it. These changes reflect a very small bias toward the call side, so I see the Equity OI Change as moderately bullish for the market in the near-term.

OI Participation

Index OI Participation is +9.3% versus 2021 levels, so I see it as moderately bullish in the long-term.

Equity/ETF OI Participation is +5.5% versus 2021 levels, so I see it as moderately bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR)

The VIX OIPCR is up 5 ticks to 0.65 versus 0.60 last week. This ratio tends to move in the same direction as the VIX index, but this uptick is rather large given the VIX was only +0.57 (+1.8%) over the last 4 sessions. However, the VIX is already quite elevated, so I see the VIX OIPCR as moderately bullish in the very near-term for the markets. This ratio is now up 21 ticks in the past 3 weeks, and has now exceeded the 200-day SMA of 0.62. Therefore, I see it as neutral in the long-term for the markets.

The SPX OIPCR is down 7 ticks to 1.76 versus 1.83 last week. This ratio tends to move in the same direction as the SPX, so this downtick is consistent with the SPX which has fallen 193.26 points (-4.7%) over the last 4 sessions. As a result, it implies that SPX option traders (who are almost entirely institutional) are only modestly hedged at these levels and may be expecting a bit of a bounce from the SPX next week. Therefore, I see the SPX OIPCR as moderately bullish in the near-term for the market. This ratio is now down 26 points over the past 3 weeks, and it is now 31 ticks below the 200-day SMA of 2.07. I see it as now moderately bullish in the long-term.

The normally very stable Equity OIPCR is down 2 ticks to 0.80 versus 0.82 last week. This ratio is now 3 ticks below its 12-month peak. As a result, equity option traders (which includes a lot of retail traders) are finally showing a little less caution. Therefore, I see the Equity OIPCR as neutral in the near-term for the market. As this ratio is now almost equal to the 200-day SMA (currently 0.79), it remains neutral in the long-term.

Cboe Volume Put/Call Ratios (VPCR)

The Cboe VIX VPCR has been mostly neutral this week. The 0.62 reading on Thursday (5/12) was neutral, and the current reading of 0.54 as I’m writing this (mid-day Friday 5/13) is neutral. I see it as neutral in the very near-term.

The Cboe SPX VPCR has been moderately bearish for most of this week. The 2.01 reading on Thursday (5/12) was moderately bearish, but the current reading of 1.39 as I’m writing this (mid-day Friday 5/13) is neutral. While intraday levels tend to decline as the day goes on, I see it as moderately bearish in the very near-term. With a 5-day moving average of 1.64 versus 1.63 last week, it remains moderately bearish in the long-term.

The Cboe Equity VPCR has been moderately bearish for most of this week. The 0.81 reading on Thursday (5/12) was moderately bearish, and the current reading of 0.74 as I’m writing this is moderately bearish. While this ratio tends to decline as the day goes on, I see it as moderately bearish in the very near-term. With a 5-day moving average of 0.76 versus 0.62 last week, it is now also moderately bearish in the long-term. As noted below, long-term for this ratio is about a week or two.

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 or two.

OCC Volume Put/Call Ratios (VPCR)

The OCC Index VPCR has moved from moderately bearish (>1.10) to bearish (>1.40) this week. As a result, I see it as bearish in the near-term. It has now been bearish in 10 of the last 12 sessions, so I see it as still bearish in the long-term.

The OCC Equity VPCR has been moderately bearish (>0.85) for most of this week. Therefore, I see it as moderately bearish in the near-term. With a 5-day average of 0.97 versus 0.87 last week, I see it as moderately bearish in the long-term too.

Volatility

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 5/13), the VIX is -2.63 to 29.14. At its current level, the VIX is implying intraday moves in the SPX of about 61 points per day (this was 69 last week). The 20-day historical volatility is 179% this week versus 178% last week. The VIX remains well above its long-term average (19.57) and also well above its long-term mode (12.42) which I consider to be “normal” volatility.

The VIX has been above 30 for the past 2 weeks; a level that has long been associated with high uncertainty and high anxiety among traders. As evidenced by the 3 days with more than a +1.0% gain and the 7 days with more than a -1.0% loss during that period, high volatility usually means big moves in both directions. Therefore, I see the VIX as volatile in the very near-term for the equity markets. At the time of this writing (mid-day Friday 5/13) the VIX is more than 7 points below its weekly high, but nearly 10 points above its level 3 weeks ago. I see it as also volatile in the long-term.

On a week-over-week basis, VIX call prices have fallen modestly while VIX put prices have also fallen modestly. At -6 versus +7 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is little changed, but at this level it is still negative and therefore still bullish in the very near-term. VIX call prices have mostly leveled off now, whereas VIX put prices are still trending modestly higher. Therefore, I see the VIX IV Gap as still moderately bullish in the long-term.

Keep in mind, this is not only a contrarian indicator most of the time, it tends to be one of the earliest and shortest-term indicators I discuss in this report, so it can also change directions very quickly.

VIX Futures

As of this writing (mid-day Friday 5/13) the nearest VIX futures contract (which expires on 5/18) was trading at 29.21; very close to the spot VIX level of 29.14. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 28.74; still rather close to the spot price.

With an adjusted level that is barely below the spot price, futures traders are indicating that they believe the VIX is unlikely to drop much, if at all, over the next few days. However, with the VIX still near 30, even a small drop in equities is unlikely to result in any increase in the VIX. 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 27.17 and 25.48 respectively. With the RPAPs of the further-dated contracts about 2 - 3 points (respectively) below the spot price, I see VIX futures as moderately bullish 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 already high and steady this week, the VIX Hedging Effectiveness has been Good in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing some sensitivity to market volatility, and maybe somewhat effective as hedging tools in the very near-term. VIX Hedging Effectiveness is also Good 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.

Cryptocurrencies

The “risk-off” environment hit most crypto assets hard this week with the Bloomberg Galaxy Crypto Index down roughly 10% since May 9th. Beneath the surface of the index, bitcoin is down 18%, Ethereum down 13%, and a popular stablecoin, Terra UST, broke it’s one for one peg with the dollar. We wrote about UST’s nearly 20% interest rate on the Anchor Protocol platform about 6 weeks ago. At the time, Terra was purchasing bitcoin to use as reserves to meet redemptions and maintain the peg with the dollar - unfortunately, Terra’s reserves of bitcoin could not prevent the 99% decline to 2 cents on the dollar as of 5/12/2022. Treasury Secretary Yellen and SEC Chairman Gensler have repeatedly warned of the risks of stablecoins. The recent declines and heightened volatility in crypto assets highlight how important it is to understand what investments you are holding, and the risks involved.

For Schwab’s perspective on cryptocurrencies, please visit: www.schwab.com/cryptocurrency

 

Economic reports for next week

Mon 5/16

None

Tue 5/17

Retail Sales for Apr – This report is a widely watched gauge of consumer sentiment and spending habits.

Industrial Production & Capacity Utilization for Apr – 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. 

Business Inventories for Mar – This is a lagging indicator since all of the components have been previously released.

Wed 5/18

Housing Starts and Building Permits for Apr – 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.

Thu 5/19

Initial Jobless Claims - For the week ending 5/7/22, claims were up 1k after being up 21k the prior week. The 4-week moving average now stands at 193k, up 5k from the prior week.

Existing Home Sales for Apr – 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.

Fri 5/20

None

Interest Rates

The probability of another 0.50% rate hike on June 15th remains at 100% and the probability of a 0.75% hike has increased from about 14% to 18%. The interest rate on the 10-year treasury ($TNX) began the week around 3.14% and fell throughout most of the week. It is currently around 2.92% at the time of this writing (mid-day Friday 5/13).

Outlook:

While the bargain hunters may be down, they’re not yet out. The VIX tells us that elevated volatility is likely to persist a while longer, but once again the indicators point to a modest potential gain by the end of the week.  

Bottom Line

In last week’s battle between the bullish and bearish indicators, the bears came out on top… but next week it could be a different story. On one hand, the VIX index is still around 30, there is still a lot of dispersion in the indicators, and as noted in the Cryptocurrencies section above, turmoil there is likely spilling over to some extent, into the equity markets. On the other hand, the next Fed meeting is still a month away, earnings season is nearly over, and most of next week’s economic reports are not typically big market movers.

As you can see below, there were about an equal number of upgrades and downgrades this week and with these changes the overall balance is essentially the same. While last week’s green indicators missed the mark, the outlook for next week is the same; Volatile overall, followed by a Moderately Bullish gain by week’s end.  

Composite

Past performance is no guarantee of future results.

Key:

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.

^ means this indicator is at a historical extreme that has often (though not always) preceded a market reversal.

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