Weekly Trader’s Outlook

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Weekly Market Review:

Earnings Summary

Q2 earnings has just begun. With 17 (3%) of the companies in the S&P 500 reporting, below are the results for Q2 so far, relative to the final results from recent quarters.

Quarter EPS beats        Rev beats

Q2 ‘20            80%                  59%

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%

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%

Average            75%                  58%

From a growth standpoint, Q2 EPS is -10.0% y/o/y; Q2 revenue is -8.5% y/o/y. This compares to -8.1% and +0.9% respectively in Q1. Below are some of the higher-profile companies that reported earnings this week.  

Earnings Recap

Symbol            Actual  Estimate

PAYX               0.61      0.60

LEVI                 -0.48     -0.47

BBBY               -1.96     -1.11

WBA                 0.83      1.19

Economics Recap

Better (or higher) than expected:

• ISM Non-Manufacturing Index for Jun: 57.1 vs. 51.0 est
• JOLTS for May: 5.397M vs. 4.500M est
• Initial (weekly) Jobless Claims: 1.314M vs. 1.375M est

On Target:

• Wholesale Inventories May: -1.2% vs. -1.2% est

Worse (or lower) than expected:

• Consumer Credit for May: -$18.2B vs. -$15.0B est
• Producer Price Index (PPI) for Jun: -0.2% vs. +0.4% est
• Core Producer Price Index (PPI) for Jun: -0.3% vs. +0.1% est

This was a light week for economic reports, but there were 3 positive results worth noting. In another sign that the employment situation is mending very slowly, the Job Openings and Labor Turnover Survey (JOLTS) showed that new job openings rebounded from a 5½ year low in May. The ISM Manufacturing Index, saw its biggest monthly increase in June, since 1980.

And finally, at 1.314M, Initial Jobless Claims came in modestly below the 1.375M estimate, and below last week’s 1.413M level. This was the 14th consecutive weekly decline, but aggregate initial jobless claims over the past 16 weeks now exceed 50M. As you can see below, the week/over/week decline continues to flatten out.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Market Performance YTD

Here is the 2020 YTD (versus 2019 full-year) performance of the market broken down by the 11 market sectors (as of the close on 7/9/20):

                                                            2020 YTD                      2019 Final

1. Info Tech                                  +18.0%                         +48.0%
2. Consumer Disc                         +13.0%                         +26.2%
3. Communications Svc             +3.9%                           +30.9%
4. Healthcare                                 -1.0%                            +18.7%
5. Cons Staples                            -6.1%                            +24.0%
6. Materials                                   -7.1%                            +21.9%
7. Real Estate                               -9.7%                            +24.9%
8. Utilities                                     -12.2%                          +22.2%
9. Industrials                                 -17.5%                          +26.8%
10. Financials                                 -26.3%                          +29.2%
11. Energy                                       -42.6%                          +7.6%

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2020 YTD (versus 2019 full-year) performance of the major U.S. equity indices (as of the close on 7/9/20):

                                                            2020 YTD                      2019 Final

• S&P 500 (SPX)                             -2.4%                            +28.9%
• Nasdaq Composite (COMPX)    +17.6%                         +35.2%
• Dow Industrials (DJI)                 -9.9%                            +22.3%
• Russell 2000 (RUT)                    -16.2%                          +23.7%

Technicals

Barring a major downturn between the time of this writing (mid-day Friday 7/10) and when you read it, last week’s outlook of Moderately Bullish and Volatile seems to have been right on target. While it is not very common for equities and volatility to rise together, as of the close on Thursday (7/9) the SPX was +22.04 (+0.7%) and the VIX was +1.58 (+5.7%).

Last week I expressed concern that the SPX was attempting to break out of the recent consolidation zone (yellow box), so I view this week’s mostly sideways action as encouraging; though I’m not sure it can last. As I’ve said several times before, I’d prefer a little more sideways consolidation (yellow arrow) versus a sharp rise that would likely be followed by another pullback.

As shown in the chart below, on Thursday (7/9) the SPX entered a “Golden Cross”, when the 50-Day SMA (yellow line) crossed up through the 200-day SMA (purple line). Technical traders have traditionally seen this as a bullish signal, though it hasn’t worked so well lately. Following the last Golden Cross (3/29/19) the SPX lost more than 10% before it reached the next "Death Cross” (3/27/20); that should have been a bullish period. Then following the Death Cross, the SPX gained more than 24% through yesterday; that should have been a bearish period.  

Source: StreetSmart Edge^®

Past performance is no guarantee of future results.

2009 SPX same as 2020 SPX?

Below is an update of the comparison chart I’ve shown for several weeks. This week there has been a bit of a divergence, though that may soon result in a realignment as it did back in mid-May.  

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Option Volumes:

After less than 2 weeks of trading, aggregate options industry volume in July is averaging 27.8M contracts per day. That is below the all-time monthly high of 31.5M contracts per day in June but well above the July 2019 level of 18.3M contracts per day.

Open Interest:

OI Change:

In reviewing Cboe open interest (OI) data (where greater than 95% of the index activity occurs), I observed the following changes over the past week:

In reviewing VIX data for the past week I observed the following:

• VIX call OI was +1.1%              
• VIX put OI was +1.0%               

These changes reflect an insignificant bias toward the call side, so I see them as neutral for the market this week.

In reviewing SPX data for the past week I observed the following:

• SPX call OI was +0.3%
• SPX put OI was +1.0%             

These changes reflect an insignificant bias toward the put side, so I see them as neutral for the market this week.

In reviewing Exchange Traded Products (ETP) data (which includes SPY, QQQ, DIA & IWM) for the past week, I observed the following:

• ETP call OI was +1.5%             
• ETP put OI was +1.3%              

These changes reflect an insignificant bias toward the call side, so I see them as neutral for the market this week.

Combining VIX, SPX & ETP data this week, overall I see the Index/ETP OI Change as neutral in the near-term.

In reviewing Cboe Equity Option data (where about 35% of all option activity occurs) for the past week I observed the following:

• Equity call OI was +2.1%                      
• Equity put OI was +1.9%                      

These changes reflect an insignificant bias toward the call side, so I see the Equity OI Change as neutral in the near-term.

OI Participation

Index OI Participation is -15.9% versus 2019 levels, so I see it as moderately bearish in the long-term.

Equity OI Participation is +22.6% versus 2019 levels, so I see it as bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is down 2 ticks to 0.89 versus 0.91 last week. At this time, VIX options traders are holding (long or short) 89 puts for every 100 calls. This downtick is somewhat inconsistent with the increase in the VIX index which was +1.58 (+5.7%) through Thursday (7/9), so it likely implies that VIX option traders are expecting the VIX to remain elevated or possibly even increase modestly in the near-term. While this ratio is still higher than it was the last time the VIX was at its current level, I see the VIX OIPCR as moderately bearish in the very near-term for the markets. This ratio remains well above its 200-day SMA of 0.65 but it has now flattened out over the past 6 weeks, so I see it as neutral in the long-term.

The SPX OIPCR is up 4 ticks to 1.86 versus 1.82 last week, though it remains well below the 200-day SMA of 2.03. This ratio tends to move in the same direction as the SPX, so this modest uptick is consistent with the SPX which has risen 22.04 points (+0.7%) through Thursday (7/9). However, this uptick also probably implies slightly decreased optimism among SPX option traders (who are almost entirely institutional). Therefore I see the SPX OIPCR as neutral in the near-term for the market. Since this ratio remains relatively flat over the past several weeks, I see it as still neutral in the long-term.

The normally stable Equity OIPCR is down 1 tick to 0.85 versus 0.86 last week. While put/call ratios associated with retail (equity) option traders are often seen as contrarian indicators, that isn’t always true. In fact, the last time the Equity OIPCR was at its current level was 2014, and the SPX rose more than 11% that year. That said, extreme levels (bullish or bearish) that last a period of time, do tend to occur before short-term reversals in the market, and this one has now been at a bullish extreme for the past 2 weeks.

On one hand, this clearly reflects continued optimism among equity option traders. On the other hand, it is probably also signaling a short-term pullback is due. Therefore, I see the Equity OIPCR as breakout in the near-term for the market. And since it remains well below the 200-day SMA of 0.98, I see it as moderately bullish in the long-term.

Cboe Volume Put/Call Ratios (VPCR):

The Cboe VIX VPCR has been mostly modestly bullish this week. However, the 0.69 reading on Thursday (7/9) was neutral, but the current reading of 1.27 as I’m writing this (mid-day Friday 7/10) is moderately bullish again. While this ratio tends to decline throughout the day, I see it as moderately bullish in the very near-term.

The Cboe SPX VPCR has been moderately bearish all week. The 1.83 reading on Thursday (7/9) was moderately bearish and the current reading of 1.81 as I’m writing this (mid-day Friday 7/10) is moderately bearish. 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 average of 1.82 versus 1.71 last week, it remains moderately bearish in the long-term.

The Cboe Equity VPCR has been quite bullish this week. The 0.44 reading on Thursday (7/9) was bullish and the current reading of 0.60 as I’m writing this (mid-day Friday 7/10) is moderately bullish. Since intraday levels tend to fall throughout the day, I see it as bullish in the very near-term. If not for the slightly less bullish intraday level on this one, it would also appear to be hitting an extreme; I’ll be watching it closely in the coming days. With a 5-day moving average of 0.44 versus 0.56 last week, it is still moderately bullish 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 all 4 days 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 fewer puts than calls. Since the intraday level at the time of this writing is 124, I see the ISEE as moderately bullish in the near-term. Since this ratio has now closed above 100 in 10 of the last 13 sessions, I see the ISEE as moderately bullish in the long-term.

OCC Volume Put/Call Ratios (VPCR):

The OCC Index VPCR has moved from moderately bearish to bearish all week. As a result, I see it as bearish in the near-term. It has been bearish or moderately bearish in 37 of the last 37 sessions, so I see it as still moderately bearish in the long-term.

By contrast, the OCC Equity VPCR has been quite bullish all 4 days this week. While these two ratios often disagree, the contrast is usually not quite as great as it is at the moment. As I mentioned in the Equity OIPCR section above, extreme levels of bullishness in equity put/call ratios tend to occur just before short-term reversals, and this one is very close to the extreme that was reached just before the early June pullback.

On one hand, since extreme levels can sometimes become even more extreme, continued bullishness is possible. On the other hand, this could be a signal of an imminent pullback. Therefore I see it as breakout in the near-term. Since this one has now been bullish or moderately bullish in 16 of the last 18 sessions I see it as moderately bullish in the long-term.

Volatility:

Cboe Volatility Index (VIX)

After remaining in the high anxiety zone (30 - 40) throughout most of June, the VIX has closed below 30 every day so far in the month of July. At its current level around 28, the VIX is implying intraday moves in the SPX of about 48 points per day. Since the big VIX spike in March has now fallen out of the calculation, the 20-day historical volatility is now 92% this week versus 175% last week.  

As I mentioned in the OIPCR section above, the VIX was +1.58 (+5.7%) through Thursday (7/1), but it is down modestly at the time of this writing (mid-day Friday 7/10). Therefore I see the VIX as neutral in the very near-term for the equity markets. I see it as still volatile in the long-term.

On a week-over-week basis, VIX call prices and VIX put prices have both fallen modestly. At +85 versus +74 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) has increased just a little and at this level remains neutral in the very near-term. Since this trend hasn’t changed much in about 2½ weeks, I see it as neutral in the long-term.

Keep in mind, this is not only a contrarian indicator, 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

At the moment, the difference between the sum of the 3^rd and 4^th month futures and the 1^st and 2^nd month futures is +3.16 versus +3.50 last week. This very modest decrease is mostly due to an increase in the price of the shorter-dated contracts, while the longer-term contracts were little changed.

As of this writing (mid-day Friday 7/10), the nearest VIX futures contract (which expires on 7/15) was trading at 29.00; more than a point above the spot VIX level of 27.88. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 28.44; about a half point above the spot price.

With an adjusted level that is only fractionally above the spot price, futures traders are indicating that they believe the VIX is likely to stay fairly steady in the near-term. 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 28.46 and 27.95 respectively. With the RPAPs of the further-dated contracts both also 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 somewhat elevated, the VIX Hedging Effectiveness this week falls to Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing little sensitivity to market volatility, and may be only slightly effective as hedging tools in the very near-term. VIX Hedging Effectiveness is still 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.

Global Review/Outlook:

Asia

Hong Kong is quickly becoming an investing hub for some of China’s largest technology companies, which has resulted in more secondary listings of many Chinese companies that also trade on US exchanges. Mounting political risks which could result in US delistings has driven the recent volume increases. Market watchers however, say the volume is incremental rather than a replacement of US volume… at least for now.

North America

This week the US notified the United Nations that it intends to end its 72-year membership in the World Health Organization (WHO), even as the US reported a single-day record of more than 60,000 new coronavirus cases on Wednesday (7/8). The effective date however, is not until July 2021, so it may depend upon the outcome of the presidential election in November.

While higher case counts are partially attributable to the rapid expansion of testing, the percentage of positive tests has also been rising; especially in places like FL, TX and CA, which means the rate of infection is also accelerating. States with relatively low, but rapidly growing infection rates, now include: MT, WV, HI, and ID. Only 8 states have a reproduction rate below 1.0 now.

As you can see in the table below, COVID-19 cases worldwide now exceeds 12.2M (up from 10.7M last week) of which the US accounts for over 3.1M or 25% (unchanged from 25% last week), even though the US only accounts for about 4.3% of the world’s population. The US accounts for 24% of all global deaths (down from 25% last week).

While some states are showing weekly improvement, many are not. New York for example, accounts for 13% of all cases (down from 15% last week) and 24% of all deaths (down from 25% last week). For comparison, NY was 21% and 29% respectively at the end of May. Moving in the wrong direction; Florida now accounts for 7% of all cases (up from 6% last week), California now accounts for 10% of all cases (up from 9% last week) and Texas now accounts for 8% of all cases (up from 6% last week).

Source: Johns Hopkins University and other sources; accuracy not guaranteed

Europe

While the UK has slightly less than 1% of the world’s population, it has about 2% of the total COVID-19 cases. Spain, with only 0.6% of the world’s population has about 2% of the COVID-19 cases, and Italy with about 0.8% of the world’s population has about 2% of the COVID-19 cases.

Elsewhere

Outside of Europe, Brazil, which has about 2.8% of the world’s population, is still struggling to slow down the spread in cases, still representing 14% of the global total (unchanged from last week). India still has 6% (also unchanged from last week) and Russia has 6% (also unchanged from last week). Keep in mind, each country is using different counting methods for cases and deaths, so this comparison is not a perfect “apples-to-apples” view.

Economic reports for next week:

Mon 7/13

None

Tue 7/14

CPI for Jun – The Consumer Price Index measures the change in the average price level (inflation or deflation) of a fixed basket of goods and services, relative to the price levels from the base year of 1984.

Wed 7/15

International Trade (Import & Export Prices) for Jun – 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 Jun – 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. 

Thu 7/16

Initial Jobless Claims - For the week ending 7/4/20, claims were down 99k to 1.314M after being down 69k the prior week. The 4-week moving average now stands at 1.437M, down 63k from the prior week. With this decrease, the 4-week moving average is now 4.353k below the highest level on record (5.790M), which occurred on 4/18/20.

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

NAHB Housing Market Index for Jul – This is a composite index (ranging from 0 – 100) comprised of Single-family home sales, Future sales expectations, and Buyer traffic, and is viewed as an indicator of new home sales trends. Collectively, the components are intended to provide a gauge of overall conditions in the market for selling new homes.

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

Fri 7/17

Housing Starts and Building Permits for Jun – 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.

University of Michigan Consumer Sentiment for Jul – This is the first report for July. The final report for Jun improved to 78.1 from 72.3 previously.

Interest Rates:

Since the Fed cut interest rates essentially to zero back on March 15, there is virtually no chance of any changes in the foreseeable future, so I am suspending the interest rate section indefinitely.

Outlook:

The combination of several equity put/call ratios reaching extremes, a significant moving average crossover and a rare divergence from the 2009 pattern, all indicate that the market may be about to make a very sharp move, very soon.

Bottom Line:

As you can see below, there were many changes in the indicators, including two rather rare “Breakout” indications. As I mention often, when certain signals hit extreme levels for several days, they tend to result in quick market reversals. The difficult thing is determining exactly how extreme is too extreme, and exactly when the reversal will take place.

This week however, we have the combination of 2 equity put/call ratios (see Equity OIPCR and OCC Equity VPCR above), the 2009 roadmap (see 2009 SPX same as 2020 SPX above) and a Golden Cross (see Technicals above) all occurring at approximately the same time; not to mention the CBOE Equity VPCR which is very close to an extreme. While this makes it very difficult to determine which direction the market is going to go, it does imply that it is likely to move sharply in one direction or the other, and that means the outlook for next week is Breakout. However, since there is still much disagreement among the indicators and pinpointing the exact moment the breakout may occur can be difficult, a secondary outlook of Volatile seems like a good idea.

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.