Weekly Trader’s Outlook

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Weekly Market Review:

Earnings Summary

Q3 earnings season is over. With 500 companies (100%) of the S&P 500 reporting, below are the final aggregate results for Q3 relative to recent quarters.

Quarter EPS beats        Rev beats

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%

Q4 ’15               68%                  46%

Q3 ’15               68%                  43%

Q2 ‘15               70%                  48%

Q1 ‘15               68%                  43%

Average            75%                  58%

From a growth standpoint, Q3 y/o/y EPS growth was moderately negative at -1.0%. While this decline is less than the -3.2% forecast, it was the first quarter this year where a decline actually occurred. Q3 y/o/y revenue growth was +3.5%; slightly ahead of the +2.8% forecast.

Not all companies follow a regular calendar quarter. Below are some of the higher-profile companies that reported earnings this week.  

Earnings Recap

Symbol            Actual  Estimate

THO                  0.92      1.22

MTN                 -2.64     -2.97

MDB                 -0.26     -0.28

SFIX                 0.00      -0.06

CHWY              -0.10     -0.13

TOL                   1.41      1.31

AZO                  14.30    13.78

PLCE                3.03      3.02

AEO                  0.47      0.48

TLRD                0.53      0.43

CIEN                 0.58      0.63

ORCL               0.90      0.89

ADBE               2.29      2.26

COST                1.73      1.72

AVGO               2.16      5.38         

Economics Recap

Better (or higher) than expected:

• NFIB Small Business Optimism Index for Nov: 104.7 vs. 103.0 est
• Unit Labor Costs for Q3: +2.5% vs. +3.4% est
• Consumer Price Index (CPI) for Nov: +0.3% vs. +0.2% est
• Export Prices for Nov: +0.2% vs. +0.1% est

On Target:

• Core CPI Index for Nov: +0.2% vs. +0.2% est
• Import Prices for Nov: +0.2% vs. +0.2% est
• Business Inventories for Nov: +0.2% vs. +0.2% est

Worse (or lower) than expected:

• Nonfarm Productivity for Q3: -0.2% vs. -0.1% est
• Treasury Budget for Dec: -$208.8B vs. -$206.2B
• Producer Price Index (PPI) for Nov: 0.0% vs. +0.2% est
• Core PPI Index for Nov: -0.2% vs. +0.2% est
• Initial (weekly) Jobless Claims: 252k vs. 214k est
• Retail Sales for Nov: +0.2% vs. +0.5% est

This was a heavy week for economic data and this week I’d like to highlight Initial Jobless Claims. As you can see above and in the chart below, there was a sizable jump. At 252k, claims were the highest since 1/6/18. While this does bear watching in the coming weeks, I remind you that one data point does not make a trend, and seasonal adjustments are always more difficult during the holiday season. This might not only explain this week’s 22-month high, but also last week’s 7-month low. This also helps explain why the 4-week moving average is a better number to watch.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Market Performance

Here is the 2019 YTD performance of the market broken down by the 11 market sectors (as of the close on 12/12/19):

1. Info Tech                      +43.1%
2. Communications Svc  +28.9%
3. Financials                     +28.8%
4. Industrials                     +27.0%
5. Consumer Disc             +23.2%
6. Cons Staples                +22.5%
7. Real Estate                   +20.2%
8. Materials                       +20.2%
9. Utilities                         +18.0%
10. Healthcare                     +16.4%
11. Energy                            +5.0%

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2019 YTD performance of the major U.S. equity indices (as of the close on 12/12/19):

• S&P 500 (SPX)                             +26.4%
• Nasdaq Composite (COMPX)    +31.3%
• Dow Industrials (DJI)                 +20.6%
• Russell 2000 (RUT)                    +22.0%

Technicals

After finishing nearly flat over the first 3 trading sessions, the SPX jumped sharply on Thursday morning (12/12) when President Trump announced via Twitter that the U.S. and China are “Getting VERY close to a BIG DEAL”. Thus after hitting yet another new closing high on 12/12, the new upside resistance level is 3,168, and the old 3,025 high remains as a downside support level. As you can see in the chart below, at the time of this writing the SPX was -0.91 to 3,167.66; just below this new high.

Source: StreetSmart Edge^®

Past performance is no guarantee of future results.

Bull Market Trends

With the most recent SPX high on Monday (12/12), below is an update of the table illustrating how this bull market compares to others in the post WW II era. At 3,930 days in duration, it is now 478 days longer than the internet bull market, but at +368%, it remains second highest with regard to the percentage increase. The SPX would need to reach a level of about 3,500 to exceed the 417% gain of the strongest bull market in history.

Past performance is no guarantee of future results.

Option Volumes:

At the midpoint of the month, December aggregate option industry volume was averaging a healthy 19.5M contracts per day. That is just below the November level of 19.7M contracts per day but well below the December 2018 level of 22.9M contracts per day.

Open Interest:

OI Change:

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:

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

• VIX call OI was +5.9%              
• VIX put OI was +18.2%             

These changes show a strong bias to the put side, so I see them as bullish for equities.

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

• SPX call OI was +2.7%
• SPX put OI was +2.9%             

These changes show almost no bias to the call or put side, so I see them as neutral for equities.

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

• ETP call OI was +3.1%             
• ETP put OI was +4.2%              

These changes show a small bias to the put side, so I see them as moderately bearish for equities.

Combining VIX, SPX & ETP data this week, overall I see the Index/ETP OI Change as moderately bullish 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 +4.0%                      
• Equity put OI was +4.2%                      

These changes show almost no bias to the call or put side, so I see the Equity OI Change as neutral in the near-term.

OI Participation

Index OI Participation is currently +6.4% versus 2018 levels, so I see it as moderately bullish in the long-term.

Equity OI Participation is currently -2.5% versus 2018 levels, so I see it as neutral in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is up 6 ticks at 0.65 versus 0.59 last week. At this time, VIX options traders are holding (long or short) 65 puts for every 100 calls. At this level, this ratio is not only well above the 200-day SMA (Simple Moving Average) of 0.34, it is now at a new 4-year high. This ratio usually moves up and down with the VIX index, so while the direction is consistent, the magnitude of this move is quite surprising given the VIX is only +0.32 (+2.3%) this week. At its current level, I see the VIX OIPCR as bullish in the very near-term for the markets. It remains volatile in the long-term.

This week the SPX OIPCR is up 1 tick to 2.20 versus 2.19 last week. At this level this ratio remains well above the 200-day SMA of 2.04 but well below its YTD high of 2.43. Most of the time, this ratio tends to move in the same direction as the index, so this move is not inconsistent with the SPX which has risen more than 22 points (+0.7%) this week. This move implies that SPX option traders (who are almost entirely institutional) have modestly increased their hedging activity this week. At this level I see the SPX OIPCR as neutral in the near-term for the market. Given that this ratio has been falling for about 7 weeks now, it remains moderately bullish in the long-term.

The normally stable Equity OIPCR is unchanged at 1.00 versus 1.00 last week. Since equities rose modestly (mostly on Thursday) this sideways reading is not too surprising, as historically option traders tend to be more reactive than proactive. At this level the Equity OIPCR remains moderately bullish in the near-term for the market. And since it is very close to its 200-day SMA of 1.02, I see it as neutral in the long-term.

CBOE Volume Put/Call Ratios (VPCR):

The CBOE VIX VPCR has moved from neutral to moderately bullish this week. The 0.73 reading on Thursday (12/12) was neutral but the current reading of 1.59 as I’m writing this (mid-day Friday 12/13) is also moderately bullish. Therefore, I see it as moderately bullish in the very near-term.

The CBOE SPX VPCR was moderately bearish this week except for Thursday. The 1.29 reading on Thursday (12/12) was moderately bullish, but the current reading of 1.88 as I’m writing this (mid-day Friday 12/13) is moderately bearish. While intraday levels tend to decline as the day goes on, I see this ratio as moderately bearish in the very near-term. With a 5-day average of 1.76 versus 1.76 last week, it is moderately bearish in the long-term.

The CBOE Equity VPCR has been all over the map this week. The 0.45 reading on Thursday (12/12) was very bullish (to the point of being contrarian) but the current reading of 0.63 as I’m writing this (mid-day Friday 12/13) is neutral. Since intraday levels tend to fall throughout the day, I see it as volatile in the very near-term. With a 5-day moving average of 0.58 versus 0.62 last week, it is 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 below 100 twice and above 100 twice this week. 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. Since the intraday level at the time of this writing is 96, I see the ISEE as moderately bearish in the near-term. Since this ratio has now closed moderately below 100 in only 7 of the last 12 sessions, and just above it the other 5, I see the ISEE as neutral in the long-term.

OCC Volume Put/Call Ratios (VPCR):

The OCC Index VPCR has been moderately bearish all week, so I see it as moderately bearish in the near-term. Also, it has been bearish or moderately bearish in 24 of the last 24 sessions, so I see it as moderately bearish in the long-term                                                                                            The OCC Equity VPCR by contrast, has been mostly moderately bullish this week. As with many equity ratios, this one tends to be more reactive than proactive, and as equities improved as the week progressed, so did the bullishness of this ratio. As a result, I see it as moderately bullish in the near-term. However, since this ratio has been moderately bullish in 12 of the last 18 sessions, I see it as still moderately bullish in the long-term.

Volatility:

As I mentioned in the OIPCR section above, the VIX is only +0.32 (+2.3%) through Thursday of this week, and it is not quite 2 points above its YTD low. As a result, the 20-day historical volatility has risen to 113% this week versus just 97% last week.

Cboe Volatility Index (VIX)

As I’m writing this (mid-day Friday 12/13), the VIX is -0.55 points (to 13.39); not quite a point above the long-term statistical mode of 12.42 (or “normal” volatility) but well below the long-term statistical mean of 19.16. At this level, the VIX represents fairly normal volatility, which doesn’t seem unreasonable given current geopolitical concerns. While the market has done much better in the latter part of this week than in the earlier part, the move isn’t unreasonable given the phase one US/China trade deal, even if all of the details of the deal aren’t yet completely clear. At this level the VIX is neutral in the very near-term for the equity markets. It remains neutral in the long-term.

On a week-over-week basis, VIX call prices have fallen modestly and VIX put prices have risen modestly. At +54 versus +88 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is modestly lower and at this level it is neutral in the very near-term. Generally lower for about 5 weeks now, it remains moderately bullish in the long-term. Keep in mind, this is not only a contrarian indicator, it tends to be one of the earliest indicators I discuss in this report, and 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 +4.95 versus +4.40 last week. This slight increase is mostly due to a small decrease in the near-term expirations, while later expirations have remained fairly steady.                           

As of this writing (mid-day Friday 12/13), the nearest VIX futures contract (which expires on 12/18) was trading at 13.25; very close to the spot VIX level of just 13.39. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 13.04; still fairly close to the spot price.

With an adjusted level that is just fractionally below the spot price, futures traders are indicating that they believe the VIX is likely to stay about where it is 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 14.18 and 14.65 respectively. With the RPAPs of the further-dated contracts both also only about a point above 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.

The VIX rose and then fell this week, and 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 at least some sensitivity to market volatility, and may be at least moderately 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.

Global Review/Outlook:

North America

On Tuesday morning, House Speaker Nancy Pelosi, Chairman of the House Judiciary Committee Jerrold Nadler, and Chairman of the House Intelligence Committee, Adam Schiff officially announced articles of impeachment against President Trump. Reaction in premarket equity futures was minimal.

Separately and also on Tuesday, House Democrats announced that the United States-Mexico-Canada Trade agreement (USMCA) will be voted on by the House of Representatives; a key hurdle before the NAFTA replacement bill can be passed through the Senate and on to President Trump for passage into law. However, Senate Majority Leader Mitch McConnell said the Senate would not take up the measure until after the conclusion of the impeachment trial; likely in January.

Asia

On Tuesday morning (12/10) Chinese trade negotiators announced that China and the US “are laying the groundwork” for a delay on the 15% tariffs scheduled to take effect next week on about $165B in Chinese goods. The announcement came about an hour before equities opened in NY, and produced an abrupt turnaround in premarket S&P 500 futures from about a 14-point decline to about a 19-point gain. US trade officials did not comment on the report, but the move appears to be intended to allow more time for negotiation on the point of China committing to specific US Agricultural purchases.

Then on Thursday (12/12) the two sides apparently reached a deal “in principal” that may or may not reduce existing tariff rates on Chinese goods, but will halt the new tariffs that were set to take effect on Sunday (12/15). In return, China has apparently agreed to purchase a “substantial” amount of U.S. farm goods. As of the time of this writing (mid-day Friday 12/13) while some details were still unclear, it does appear the new tariffs on 12/15 will not take effect and some tariffs (imposed on 9/1/19) currently at 15% will be reduced to 7.5%. 

Europe

On Thursday (12/12), citizens of the UK voted in a snap general election intended to end the Brexit impasse. Conservative Party leader, Prime Minister Boris Johnson, and his primary opponent Labor Party leader, Jeremy Corbyn offered differing views on how to resolve it. Johnson, who once vowed to push Brexit though “no matter what” continued to walk a hard line. Corbyn by contrast, continued to push for a renegotiation with the European Union (EU) followed by a possible second referendum vote.

When the votes were counted, Boris Johnson won a decisive majority (364 of 650 seats) in the House of Commons, paving the way for Parliament to initiate the long-delayed divorce from the European Union by the end of January; about 3½ years after voters originally approved the referendum. Perhaps most surprising was the decisiveness of the vote, which resulted in many long-held working-class seats in England and Wales switching to the Conservative party.

Economic reports for next week:

Mon 12/16

None

Tue 12/17

Housing Starts and Building Permits – 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.

Industrial Production & Capacity Utilization – 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. 

Wed 12/18

None

Thu 12/19

Initial Jobless Claims - For the week ending 12/5/19, claims were up 49k to 252k after being down 10k the prior week. The 4-week moving average now stands at 224k, up 6k from the prior week. With this increase, the 4-week moving average is now 22k above the 48-year low set on 4/13/19.

Existing Home Sales – 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.

Leading Economic Indicators – As you probably know, this is more of a trailing than a leading report since the 10 components have already been released. As a result, the market reaction is usually fairly muted.

Fri 12/20

Personal Income & Spending – 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) – 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.

GDP – This is the third estimate (Final) for Q3 and since this data is now 3 months old, any revision is likely to be ignored by the markets. You’ll recall that the second (Preliminary) report in Q3 showed +2.1%. 

University of Michigan Consumer Sentiment – This is the Final report for Dec. At 99.2, the mid-month report was up from 96.8 the prior month.

Interest Rates:

Following Wednesday’s (12/11) FOMC meeting, in which the Fed left rates unchanged as expected, and the announcement on Thursday (12/12) of a tentative trade deal with China, the Fed Funds Futures probability of a rate change at the next meeting (1/29/20) has dropped to 0% (green box) versus about 13% last week. The Fed has all but said it would like to remain on hold throughout 2020. And given that the last 12 rate changes were immediately preceded by a probability >68%, the futures markets also appear to be currently pricing in very little chance of any rate changes in 2020 (red box).

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Outlook:

The markets have been expecting a US/China phase one trade deal since it was first announced by President Trump back on 10/11/19. Since that time, the SPX has risen 230 points (+7.8%). Essentially, the markets were in “buy the news” mode. Now that the deal is “official” (if not still a little vague) it is reasonable to assume that the markets could “sell the news”, or at least pause for a while.

Bottom Line:

As you can see below, the changes in the indicators this week were fairly balanced, so the outlook for next week is Neutral. And while I won’t give a secondary outlook of volatile, given the relatively low level of the VIX, occasionally periods of elevated volatility are certainly possible.

Last week’s Neutral outlook was right on target for the first 3 days of the week, until Thursday when President Trump tweeted that the U.S. and China are “Getting VERY close to a BIG DEAL”. The SPX jumped >25 points to a new high following that announcement. This is a perfect example of why I always include the caveat; “Trump’s tweets still trump everything else”.  

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.