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Weekly Market Review:
The regular Q4 earnings season is now in full swing. This week, 37 S&P 500 companies reported Q4 earnings and 29 of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.
Overall, 64 (13%) of the companies in the S&P 500 have reported Q4 results. Below are the aggregate beat rates relative to the final results from recent quarters.
Quarter EPS beats Rev beats
Q4 ’21 78% 70%
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%
Q2 ‘19 76% 56%
Q1 ‘19 77% 57%
Q4 ’18 73% 60%
Q3 ’18 82% 61%
Q2 ‘18 84% 72%
Q1 ‘18 81% 74%
Average 79% 66%
From a growth standpoint, Q4 earnings are +21.9% y/o/y so far versus the +21% estimate when the quarter ended. Q4 revenue is +13.5% y/o/y so far versus the +13% estimate when the quarter ended. This compares to actual growth of +39.1% and +17.4% respectively in all of Q3.
Better (or higher) than expected:
- Housing Starts for Dec: 1,702k vs. 1,650k est
- Building Permits for Dec: 1,873k vs. 1,703k est
- Leading Economic Indicators for Dec: +0.8% vs +0.8% est
Worse (or lower) than expected:
- NAHB Housing Market Index for Jan: 83 vs. 84 est
- Initial (weekly) Jobless Claims: 286k vs. 225k est
- Existing Home Sales for Dec: 6.18M vs. 6.42M est
This was a relatively light week for economic data, and what concerns me the most is the continued deterioration in employment data. At 286k, Initial Jobless Claims came in well above the 225k estimate and also well above last week’s 231k level; the third consecutive weekly increase. Claims are now averaging 231k for the past 4 weeks. Just 3 weeks ago, claims had fallen to pre-COVID levels. Since claims are a leading indicator, this uptrend may mean that the disappointing Nonfarm Payrolls we’ve seen for the past 2 months, may continue for another month.
Source: Schwab Center for Financial Research
Past performance is no guarantee of future results.
Market Performance 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 1/20/22):
2022 YTD 2021 Final Category
- Energy +15.0% +47.7% Defensive
- Financials -0.2% +32.5% Cyclical
- Cons Staples -1.6% +15.6% Defensive
- Industrials -3.5% +19.4% Cyclical
- Utilities -3.6% +14.0% Defensive
- Materials -5.0% +25.0% Cyclical
- Communications Svc -5.4% +20.5% Defensive
- Healthcare -7.2% +24.2% Defensive
- Consumer Disc -9.4% +23.7% Cyclical
- Real Estate -9.4% +42.5% Cyclical
- Info Tech -9.6% +33.4% Cyclical
Source: Bloomberg L.P.
Past performance is no guarantee of future results.
Here is the 2022 YTD (versus 2021 full-year) performance of the major U.S. equity indices (as of the close on 1/20/22):
2022 YTD 2021 Final Forward P/E Ratio
- S&P 500 (SPX) -6.0% +26.9% 20.3
- Nasdaq Composite (COMPX) -9.5% +21.4% 28.7
- Dow Industrials (DJI) -4.5% +18.7% 18.4
- Russell 2000 (RUT) -9.8% +13.7% 22.6
The SPX fell 180 points (-3.9%) through Thursday (1/20) and is down another 20 points or so as I’m writing this (mid-day Friday 1/21). With a top-to-bottom range of more than 7 full points in the VIX and more than 210 points in the SPX, I think it’s safe to say that last week’s outlook of “Volatile” was not out of line.
As you can see, the SPX only managed to hold the 100-day SMA (4,575) on Tuesday (1/18) before testing the 200-day SMA (4,429) on Friday. At the time of this writing, it’s too early to know if a breach will occur or not. If it does, a 10% correction (below 4,316) may not be far behind. That has not occurred since before the March 2020 bear market.
Source: StreetSmart Edge®
Past performance is no guarantee of future results.
As the monthly expiration approaches (on Friday 1/21), January option volume is averaging a very robust 42.4M contracts per day. That is well above the final December level of 38.7M, but below the January 2021 level of 44.4M contracts per day. January is always a big expiration month because equity and ETF LEAPs options expire in January. In fact, with 49.2M contracts traded, option volume on Thursday (1/20) was the heaviest since 12/17/21 (quarter-end expiration day) and it was only the 17th trading day ever to exceed 49M contracts. As a reminder, November’s 45.2M per day level was the busiest month of trading in the history of the options industry.
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 -23.4%
- VIX put OI was -32.0%
Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These sharp declines reflect the January contract expiration on Wednesday (1/19) and are therefore N/A this week.
In reviewing the SPX OI Change for the past week I observed the following:
- SPX call OI was +4.3%
- SPX put OI was +0.5%
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+1.3%
- ETP put OI was +1.4%
The aggregate changes in Exchange Traded Products reflect an insignificant bias toward the put side, so I see the ETP OI Change as neutral 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 +0.9%
- Equity put OI was +1.3%
Equity volume tends to have a large retail component to it. These changes reflect an insignificant bias toward the put side, so I see the Equity OI Change as neutral for the market in the near-term.
Index OI Participation is +6.6% versus 2021 levels, so I see it as moderately bullish in the long-term.
Equity/ETF OI Participation is +14.4% versus 2021 levels, so I see it as bullish in the long-term.
Open Interest Put/Call Ratios (OIPCR):
The VIX OIPCR is down 6 ticks to 0.47 versus 0.53 last week. This ratio tends to move in the same direction as the VIX index, so this move appears quite inconsistent with the VIX, which was +6.40 (+33.4%) over the last 3 sessions. However, as mentioned in the OI Change section above, January VIX contracts expired on Wednesday (1/19) and when that occurs the OIPCR becomes unreliable. As a result, the VIX OIPCR is N/A in the very near-term for the markets. This ratio is now down 33 ticks in the last 6 weeks and is also well below the 200-day SMA of 0.63. As a result, I see it as moderately bearish in the long-term for the markets.
The SPX OIPCR is down 6 ticks to 2.08 versus 2.14 last week. This ratio also tends to move in the same direction as the SPX, so this sizable downtick is consistent with the SPX, which has fallen 180.12 points (-3.9%) over the last 3 sessions. As a result, it likely indicates that SPX option traders (who are almost entirely institutional) could be expecting a near-term bounce in the SPX next week. Therefore, I see the SPX OIPCR as moderately bullish in the near-term for the market. This ratio is now 18 ticks below its mid-December high and below the 200-day SMA of 2.21. I see it as moderately bullish in the long-term.
The normally very stable Equity OIPCR is up 1 tick to 0.79 versus 0.78 last week. This is the highest level for this ratio since mid-October. At this level it implies that equity option traders (which includes a lot of retail traders) are becoming increasingly less bullish. Therefore, I see the Equity OIPCR as neutral in the near-term for the market. This ratio is now just above the 200-day SMA (currently 0.78), but I see it as still neutral in the long-term.
Cboe Volume Put/Call Ratios (VPCR):
The Cboe VIX VPCR has been neutral all week. The 0.60 reading on Thursday (1/20) was neutral and the current reading of 0.89 as I’m writing this (mid-day Friday 1/21) is neutral. While this ratio tends to decline as the day goes on, I see it as neutral in the very near-term.
The Cboe SPX VPCR has been moderately bearish all week. The 1.77 reading on Thursday (1/20) was moderately bearish, but the current reading of 1.57 as I’m writing this (mid-day Friday 1/21) 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 1.78 versus 1.68 last week, I see it as moderately bearish in the long-term too.
The Cboe Equity VPCR has moved from moderately bullish (<0.60) to neutral (>0.60 but <0.73) this week. The 0.62 reading on Thursday (1/20) was neutral, but the current reading of 1.12 as I’m writing this is bearish. While this ratio tends to decline as the day goes on, this is a substantial move, so I see it as volatile in the very near-term. With a 5-day moving average of 0.59 versus 0.55 last week, I see it as still moderately bullish 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 been bearish in 10 of the last 13 sessions, so I see it as bearish in the long-term.
The OCC Equity VPCR has moved from moderately bullish (<0.80) to neutral (>0.80 but <0.85) this week. Therefore, I see it as neutral in the near-term. With a 5-day average of 0.78 versus 0.69 last week, it remains moderately bullish in the long-term.
Cboe Volatility Index (VIX)
At the time of this writing (mid-day Friday 1/21), the VIX is +1.41 to 27.00. At its current level, the VIX is implying intraday moves in the SPX of about 63 points per day (this was 51 last week). The 20-day historical volatility is 114% this week versus 109% last week. The VIX is well above its long-term average (19.54) and well above its long-term mode (12.42) which I consider to be “normal” volatility. At this level I see the VIX as bearish in the very near-term for the equity markets. While the VIX is 8 points below its December intraday high, it is well above its 12-month low and quite elevated overall. I see it as moderately bearish in the long-term.
On a week-over-week basis, VIX call prices are little changed while VIX put prices have risen sharply. At -61 versus +74 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is sharply lower. At this level it is bullish in the very near-term. The VIX IV Gap has been gyrating quite a bit for the past 2 weeks now, so I see it as volatile 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.
As of this writing (mid-day Friday 1/21) the nearest VIX futures contract (which expires on 1/26) was trading at 27.20; very close to the spot VIX level of 27.00. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 26.68; still quite close to the spot price.
With an adjusted level that is fairly close to the spot price, futures traders are indicating that they believe the VIX is likely to remain about where it is over the next few days. 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 24.01 and 22.60 respectively. With the RPAPs of the further-dated contracts both above average but well 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 up more than 6 points this week, the VIX Hedging Effectiveness increases to Good in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing at good sensitivity to market volatility, and maybe at somewhat 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.
As Schwab’s cryptocurrency analyst, almost every week I receive a number of interesting questions from colleagues and clients, and it occurred to me that this might be a good place to share some of them. Here is one I received this week:
Q: A recent article I read about Bitcoin stated the following: “Whoever finds the solution first is entitled to a reward, which consists of newly minted bitcoin and potentially transaction fees, which have been paid by the entity initiating the transaction. The reward is significant: As of May 2020, each new block comes with a reward of 6.25 newly minted bitcoin. This payment is what incentivizes miners to perform the work necessary to verify transactions and maintain the database”. But…if there is a finite amount of Bitcoin that will ever exist…where do those 6.25 newly minted bitcoin come from once all has been mined? What will be the incentive to continue to ‘find the solution’? Won’t this system cease to operate once all had been mined?
A: After all bitcoins have been mined, miners will only earn income from transaction processing fees, rather than a combination of both block rewards and transaction fees. While the current reward is 6.25 bitcoins, it automatically drops by 50% every 4 years. And while the quantity of bitcoins is limited to 21 million, this diminishing reward makes it possible to calculate that the last one will not be mined until 2140. I suspect not too many people are worried about what happens 118 years from now. When mining is complete, it doesn’t mean bitcoin won’t continue to have value. Imagine if all ounces of gold on the planet were known to have already been mined, would that make gold any less valuable? Certainly gold miners would stop digging, but the relatively small (and finite) amount of gold would likely still have tremendous value. In fact, it might become even more valuable. Obviously we don’t know how much gold exists on earth, but we do know how many bitcoins exist, so that scarcity is already known.
For Schwab’s perspective on cryptocurrencies, please visit: www.schwab.com/cryptocurrency
Economic reports for next week:
Case-Shiller Home Price Index for Nov – This index measures the change in the average prices of single-family, residential real estate across a broad section of 20 major cities in the US.
Conference Board Consumer Confidence for Jan – There are several other confidence measures, such as the University of Michigan Consumer Sentiment, and they don’t always agree. Gasoline prices and stock market performance tend to have the biggest impact on these measures.
New Home Sales for Dec – 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.
FOMC Rate Decision for Jan – Fed Funds Futures indicate only about a 5% chance of a rate hike.
Durable Goods Orders for Dec – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.
GDP for Q4 – This is the first estimate (Advance) for Q4 and the consensus estimate is +6.0%, which would be an increase from the 2.3% in Q3.
Initial Jobless Claims - For the week ending 1/15/22, claims were up 55k after being up 24k the prior week. The 4-week moving average now stands at 231k, up 20k from the prior week.
Pending Home Sales Index for Dec – This report measures actual contracts signed, whereas existing sales (reported last week) measures actual closings, so this one is slightly more forward looking. This one will usually only affect equity markets adversely if it comes in very low.
Personal Income & Spending for Dec – These reports use data from the monthly employment report to gauge income from wages and salaries. Personal income is also sometimes used to forecast future consumer spending.
Personal Consumption Expenditures (Core PCE) for Dec – PCE includes durable goods and nondurable goods which are directly influenced by the retail sales reports and services. This is the Fed’s preferred inflation gauge.
Employment Cost Index for Q4 – This is a measure of payroll compensation costs, which is typically the largest cost of doing business. Wage inflation is important because of its potential impact on profit margins. Wages tend to rise when labor demand exceeds labor supply.
University of Michigan Consumer Sentiment for Jan – This is the Final (second) report for Jan. At 68.8, the mid-month report was down from 70.6 the prior month.
On Thursday (1/20) the Federal Reserve finally released its study on the topic of Central Bank Digital Currencies (CBDCs). This paper was originally scheduled to be released last summer. If you have any interest in cryptocurrencies, it’s worth reading. https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf
While the FOMC has a regularly scheduled meeting next Wednesday (1/26) the Fed Funds Futures probability of an interest rate hike is only about 5%. However, the probability of an interest rate hike in March has risen to 99% from 92% only a week ago. Interest rates on the 10-year treasury ($TNX) have fallen modestly this week; from 1.81% on Tuesday to about 1.75% at the time of this writing (mid-day Friday 1/21).
Bargain hunters remain on the sidelines and the tug-o-war between high inflation or higher interest rates is still going on. With the Nasdaq Composite already in correction territory, and the S&P 500 only about 2% away, trading is likely to remain treacherous for at least another week.
As you can see below there were only a few changes this week, and while most of them were downgrades, the balance remains very close to neutral. However, like last week the VIX is quite elevated, the VIX IV Gap and the SPX OIPCR are both pointing to a possible bounce on Monday, and the short-term column includes Bullish, Bearish and Volatile indications; all of the extremes. Under these circumstances, determining the ultimate direction is far too difficult, so the most logical outlook for next week is Volatile again.
Bargain hunters lacked conviction this week as morning bounces have given way to late-day selloffs in each of the last 4 sessions. Until that changes, continue to watch for potentially more large intraday swings throughout the week. As a reminder, bargain hunting during pullbacks can be a tricky game. It's generally best to wait for 2 consecutive solid up days before adding exposure; something that hasn’t happened yet in 2022.
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.
^ means this indicator is at a historical extreme that has often (though not always) preceded a market reversal.