Weekly Trader’s Outlook

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Weekly Market Review:

Earnings Summary

It’s still very early in Q4 earnings season. With just 45 companies (9%) of the S&P 500 reporting, below are the aggregate results for Q4 relative to the final results from recent quarters.

Quarter EPS beats        Rev beats

Q4 ’19            64%                  61%     

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%

As I mentioned last week, as Q4 progressed, the earnings expectations declined; something that happens most of the time. Analyst consensus earnings expectations for the SPX in aggregate are now about $40.21, which would translate into a y/o/y earnings “growth” rate of about -0.7%; slightly better than the -1.2% in Q3. Below are some of the higher-profile companies that reported earnings this week.  

Earnings Recap

Symbol            Actual  Estimate

C                       1.90      1.83

JPM                 2.57      2.35

DAL                  1.70      1.40

WFC                 0.93      1.10

FRC                  1.39      1.26

UNH                 3.90      3.78

GS                    4.69      5.52

BLK                  8.34      7.69

BAC                 0.74      0.69

USB                 0.90      1.08

PNC                 2.89      2.91     

AA                   -0.31     -0.21

BK                    1.02      1.00

PPG                 1.31      1.34

MS                   1.20      1.02

CSX                 0.99      0.96

STT                  1.73      1.68

FAST                0.31      0.32

SLB                  0.39      0.37

JBHT                1.35      1.50

KSU                  1.82      1.84

Economics Recap

Better (or higher) than expected:

• Treasury Budget for Dec: -$13.3B vs. -$15.0B est
• Initial (weekly) Jobless Claims: 204k vs. 218k est
• NAHB Housing Market Index for Jan: 75 vs. 74 est
• Housing Starts for Dec: 1608k vs. 1390k est

On Target:

• Retail Sales for Dec: +0.3% vs. +0.3% est
• Import Prices for Dec: +0.3% vs. +0.3% est
• Business Inventories for Nov: -0.2% vs. -0.2% est
• Capacity Utilization for Dec: 77.0% vs. 77.0% est

Worse (or lower) than expected:

• NFIB Small Business Optimism Index for Dec: 102.7 vs. 104.6 est
• Consumer Price Index (CPI) for Dec: +0.2% vs. +0.3% est
• Core CPI for Dec: +0.1% vs. +0.2% est
• Producer Price Index (PPI) for Dec: +0.1% vs. +0.2% est
• Core PPI for Dec: +0.1% vs. +0.2% est
• Export Prices for Dec: -0.2% vs. +0.2% est
• Building Permits for Dec: 1416k vs. 1470k est
• Industrial Production for Dec: -0.3% vs. -0.2% est
• University of Michigan Consumer Sentiment for Jan: 99.1 vs. 99.3 est
• Job Openings and Labor Turnover Survey (JOLTS) for Nov: 6800K vs. 7250K est

This was a heavy week for economic data and this week I’d like to highlight the consumer inflation gauges. As you can see in the chart below, the December Core Consumer Price Index (CPI) indicates +2.3%; unchanged from November. And while the New York Federal Reserve Bank’s Core Underlying Inflation Gauge (UIG) was +2.1% in November, the Fed’s favorite inflation gauge, the Core Personal Consumption Expenditures (PCE), whose December report arrives on 1/30, indicated only +1.6% in November. Essentially, determining the actual (y/o/y) level of inflation, mostly depends on whom you ask.

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 1/16/20):

                                                2020 YTD                      2019 Final

1. Info Tech                       +5.1%                           +48.0%
2. Communications Svc  +4.3%                           +30.9%
3. Industrials                     +3.5%                           +26.8%
4. Utilities                          +2.5%                           +22.2%
5. Healthcare                     +2.4%                           +18.7%
6. Real Estate                   +2.1%                           +24.9%
7. Consumer Disc             +1.7%                           +26.2%
8. Cons Staples                +1.2%                           +24.0%
9. Financials                     +0.3%                           +29.2%
10. Materials                       -1.0%                            +21.9%
11. Energy                            -1.0%                            +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 1/16/20):

                                                            2020 YTD                      2019 Final

• S&P 500 (SPX)                             +2.7%                           +28.9%
• Nasdaq Composite (COMPX)    +4.3%                           +35.2%
• Dow Industrials (DJI)                 +2.7%                           +22.3%
• Russell 2000 (RUT)                    +2.2%                           +23.7%

Technicals

Despite a “buy-the-rumor” rally in the SPX of more than 12.5% since it was first announced back on October 11, 2019, there was virtually no “sell-the-news” decline when the US/China phase 1 trade deal was finally signed on Wednesday (1/15). Instead, traders were just as eager to buy now as they have been for the last 12 months. Despite high valuations (the forward P/E of the SPX is now >19) and high complacency (the VIX is very near 12-month lows) the “buy-the-dip” strategy is still working. As a result of the most recent new high on Thursday (1/16) the upside resistance has increased again to 3,316. The first line of support remains at 3,128 and the old 3,025 high remains as a longer-term downside support level.

Source: StreetSmart Edge^®

Past performance is no guarantee of future results.

Too Far, Too Fast?

I enjoy searching for market patterns to try to forecast the future. This week I was crunching some numbers and realized that from 10/11/17 through 1/26/18 the SPX was +322 points (+12.6%). Unfortunately, as you can see by the red line in the comparison chart below, this rally was followed by a sharp -10% correction over the subsequent 2 weeks. What is a bit startling is that (exactly 2 years later) from 10/11/19 (when President Trump first announced the new trade agreement with China) through Thursday (1/16/20) the SPX is +378 points (+12.8%); a nearly identical gain over a nearly identical period of time (10 days shorter). While I’m not predicting a 10% correction is imminent, this does look like a time where a little caution would be prudent.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Bull Market Trends

With the most recent SPX high on Thursday (1/16), below is an update of the table illustrating how this bull market compares to others in the post WW II era. At 3,964 days in duration, it is now 513 days longer than the internet bull market, but at +390%, 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. This would only be a 2020 YTD gain of about +8.5% if it happened by the end of 2020.

Past performance is no guarantee of future results.

With about 10 months still to go in his first term, President Trump has moved solidly into 4th place overall for market performance in the post WW II era (surpassing Bush #41 last week). As of Thursday (1/16) the SPX is +55.0% since Election Day 2016. It’s a long road to the next position (Clinton +70.1%) but it is not unrealistic to think the SPX could reach 3,641 before Election Day 2020, if the bull market continues. That would equate to less than a 13% YTD gain.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Option Volumes:

As the regular monthly option expiration approaches (Friday 1/17) volume usually gets a boost. So far, January aggregate option industry volume is averaging 23.6M contracts per day. That is above the December level of 19.9M contracts per day and also above the January 2018 level of 20.1M 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 +13.3%             
• VIX put OI was +7.8%               

These changes reflect a bias toward the call side this week, so I see them as moderately bearish for equities.

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

• SPX call OI was +4.8%
• SPX put OI was +6.0%             

These changes reflect a very modest bias toward the put side this week, so I see them as moderately bearish 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 +4.9%             
• ETP put OI was +6.5%              

These changes reflect a very modest bias toward the put side this week, 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 bearish 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 +4.1%                      
• Equity put OI was +3.8%                      

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

OI Participation

Index OI Participation is currently +3.5% versus 2018 levels, so I see it as neutral in the long-term.

Equity OI Participation is currently +0.6% versus 2018 levels, so I see it as neutral in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is down 2 ticks to 0.41 versus 0.43 last week. At this time, VIX options traders are holding (long or short) 41 puts for every 100 calls. This decrease is consistent with the move in the VIX index, which was -0.24 (-1.9%) this week, as it is common for the two to move in the same direction. At this level, this ratio is still above the 200-day SMA (Simple Moving Average) of 0.36 and it is near a 2-month low. However, it is well below the range where it spent most of the month of December. With the VIX so low, VIX option traders seem a bit too complacent from my perspective. I see the VIX OIPCR as moderately bearish in the very near-term for the markets. And since it has been in a relatively tight range for more than 4 weeks now, I see it still neutral in the long-term.

This week the SPX OIPCR is up 4 ticks to 2.31 versus 2.27 last week. At this level this ratio remains well above the 200-day SMA of 2.08 but well below its 12-month high of 2.43. Under normal circumstances, this ratio will move in the same direction as the index, so this move is not inconsistent with the SPX which has risen more than 51 points (+1.6%) this week. Still SPX option traders (who are almost entirely institutional) have definitely added a number of hedges this week. At this level I see the SPX OIPCR as moderately bearish in the near-term for the market. I see it as still neutral in the long-term.

The normally stable Equity OIPCR is up 1 tick to 1.02 versus 1.01 last week. Even as equities rose sharply this week, equity option traders remain fairly optimistic. As a result, I see the Equity OIPCR as moderately bullish in the near-term for the market. And since it is now back 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 modestly bearish to bearish this week. The 0.18 reading on Thursday (1/16) was bearish and the current reading of 0.18 as I’m writing this (mid-day Friday 1/17) is bearish. Therefore, I see it as bearish in the very near-term.

The Cboe SPX VPCR has moved from neutral to moderately bearish this week. The 1.62 reading on Thursday (1/16) was moderately bearish, but the current reading of 1.41 as I’m writing this (mid-day Friday 1/17) is neutral. Since intraday levels tend to decline as the day goes on, I see this ratio as neutral in the very near-term. With a 5-day average of 1.71 versus 1.71 last week, it remains moderately bearish in the long-term.

The Cboe Equity VPCR has been very bullish this week. The 0.47 reading on Thursday (1/16) was bullish and the current reading of 0.59 as I’m writing this (mid-day Friday 1/17) is moderately bullish. Since intraday levels tend to fall throughout the day, I see it as bullish in the very near-term. However, this ratio is now hitting a bullish extreme, and when that happens, it tends to become a contrarian indicator (more details below). So with a 5-day moving average of 0.47 versus 0.49 last week, it is moderately bearish in the long-term.

At just 0.47 the 5-day moving average has now reached an extreme low (<0.51). With both trader optimism and the SPX at record highs, this is understandable but such extreme bullishness among retail traders has often (though not always) preceded at least a modest market pullback. Below are the most recent examples when the 5-day moving average remained a current levels for more than a few days, followed by what happened in the market. Notice that a decline occurred 6 out of 8 times.

Date                                         SPX movement             Days following the extreme

6/17/2014                                  -13                                            6 - 7

6/9/2014                                   -20                                            3 - 4

1/14/2011                                   -14                                            3 - 4

12/6/2010                                  +19                                           1 - 9

4/26/2010                             -141                                       1 - 22

4/5/2010                                    +18                                           1 - 12   

7/14/2005                                  -14                                            1 - 30

12/21/2004                                -42                                            1-23

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

The most similar period was April 2010. At that time this ratio stayed at current levels for about 3 weeks, after which the SPX declined about -11% in the subsequent 4 weeks. My point here is that extremes do tend to occur before pullbacks, but not always immediately. As I mentioned above (see Too Far, Too Fast?) it does look like a time where a little caution would be prudent.

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 every day 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. While the intraday level at the time of this writing is a fairly balanced 99, I see the ISEE as moderately bearish in the near-term. Since this ratio has now closed modestly below 100 in 6 of the last 11 sessions, and modestly above 100 in the other 5, I see the ISEE as neutral in the long-term.

OCC Volume Put/Call Ratios (VPCR):

The OCC Index VPCR moved from moderately bearish earlier in the week to moderately bullish on Thursday. As a result, I see it as neutral in the near-term. However, it has been bearish or moderately bearish in 18 of the last 20 sessions, so I see it as still moderately bearish in the long-term.                                                                                                                          

The OCC Equity VPCR by contrast, has been moderately bullish all week. As with many equity ratios, this one tends to be more reactive than proactive, but like last week, as equities continued to rise, this ratio remained bullish too. As a result, I see it as moderately bullish in the near-term. Additionally, since this ratio has been moderately bullish in 25 of the last 25 sessions, I see it as still moderately bullish in the long-term.

While not quite as extreme as the Cboe Equity VPCR, the OCC Equity VPCR is indicating a fairly high level of optimism/complacency among equity option traders. At just 0.69, the 5-day moving average of the put/call ratio for activity on all of the option exchanges, is also flashing a bit of a caution flag.

Volatility:

As I mentioned in the OIPCR section above, though Thursday (1/16), the VIX was -0.24 (-1.9%) this week, and it is fractionally lower as I’m writing this (mid-day Friday 1/17). The 20-day historical volatility is 81% this week versus 93% last week.

Cboe Volatility Index (VIX)

As I’m writing this (mid-day Friday 1/17), the VIX is -0.13 points (to 12.19); close to but below the long-term statistical mode of 12.42 (or “normal” volatility) and well below the long-term statistical mean of 19.16. At this level, the VIX is indicating a fairly high level of complacency; perhaps too high. Like some of the put/call ratios, when the VIX gets too low, it has a tendency to become a contrarian indicator, but not always immediately. It last reached its current level in late December and in late November, both of which were followed by a VIX spike in the 16-17 range. As a result, at this level I see the VIX is moderately bearish in the very near-term for the equity markets. It remains moderately bullish in the long-term.

On a week-over-week basis, VIX call prices have risen again and VIX put prices have fallen again. At +162 versus +129 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is up again and at this level it remains volatile in the very near-term. Additionally, since the gap has been widening for 2 full weeks now, it is now also volatile 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 +3.85 versus +3.35 last week. This increase is again mostly due to a decline in the price of the near-term contracts, while the longer-term contracts are little changed.                             

As of this writing (mid-day Friday 1/17), the nearest VIX futures contract (which expires on 1/22) was trading at 12.73; only about a half point above the spot VIX level of just 12.19. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 12.52; barely above the spot price.

With an adjusted level that is very close to 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 13.89 and 13.60 respectively. With the RPAPs of the further-dated contracts both more than a point above the spot price, I see VIX futures as moderately bearish 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 Poor in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing very little sensitivity to market volatility, and may not be very 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

After about 4 weeks of delays, on Thursday (1/16) the Senate finally passed the new United States-Mexico-Canada Agreement (USMCA) by a solid 89-10 vote. The bi-partisan trade agreement which updates and replaces the 26-year old North American Free Trade Agreement (NAFTA) has wide support from agriculture, manufacturing, and service companies, as well as labor unions. President Trump said he will sign the agreement into law next week.

Separately, this week Speaker of the House Nancy Pelosi sent articles of impeachment against President Trump to Senate Majority leader Mitch McConnell and announced the 7 Democrats who would be serving as prosecutors during the proceedings. But even before the articles were delivered, Majority Leader McConnell stated that he doesn’t expect the Senate impeachment trial to last longer than two weeks; essentially guaranteeing an acquittal. McConnell and other Senators have contended for several weeks that House Democrats have very little credible evidence that can prove any wrongdoing on the part of the President. Chief Justice of the Supreme Court John Roberts will preside over the trial which is expected to get underway on Tuesday (1/21). Democrats have requested, among others, testimony from former National Security Adviser John Bolton, who has expressed interest in doing so, but members of Trump’s staff have stated it could present a national security risk if Bolton testified about his communications with the president. Whether Senate Republicans will allow any other witnesses to testify, has yet to be determined.

Asia

As scheduled and with much fanfare, on Wednesday (1/15) President Trump and Chinese Vice Premier Liu He inked the phase one trade agreement in Washington DC. Chinese President Xi Jinping was not in attendance and did not sign the agreement, but Vice Premier Liu relayed his comments that the deal reflects “mutual respect” between the US and China. President Trump hailed the deal as a “momentous step, one that has never been taken before with China, towards a future of fair and reciprocal trade,” He also called it a “sea change in international trade”. It does not remove most of the existing tariffs on Chinese imports. It also does not include any stipulations on the more challenging issues relating to intellectual property violations, forced technology transfer, and subsidization of Chinese industries. Those issues are supposed to be negotiated in phase 2 or phase 3; whenever that might occur. As shown in the Bloomberg chart below, what it does include is a promise by Beijing to purchase $200B more in US goods and services, including more than $30B in agricultural products.

Europe

Despite urging from the US to the contrary, British Prime Minister Boris Johnson has indicated his willingness to allow the use of some technology produced by Chinese telecom giant Huawei Technologies, in the buildout of 5G networks across the UK; citing a lack of available alternative technology. Unless a better alternative can be provided soon, he may have no choice if he is to keep to his commitment of delivering 5G technology nationwide by 2027.

Separately in Brexit news, a potential dispute over fishing waters between the Island nations and continental Europe may become the next Brexit battleground topic. Both sides agreed to resolve the issue by June. The current Brexit deadline of January 31^st was just approved by lawmakers (330 - 231) on Friday (1/10), so it looks like a firm date has finally been set.

Economic reports for next week:

Mon 1/20

Dr. Martin Luther King Jr. Day - Markets Closed

Tue 1/21

None

Wed 1/22

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.

Thu 1/23

Initial Jobless Claims - For the week ending 1/11/20, claims were down 10k to 204k after being down 9k the prior week. The 4-week moving average now stands at 216k, down 8k from the prior week. With this decrease, the 4-week moving average is now 14k above the 48-year low set on 4/13/19.

Fri 1/24

None

Interest Rates:

The Fed Funds Futures probability of a rate change at the next meeting (1/29/20) increased modestly this week to a 15.5% chance of a rate hike (green box) versus 10.2% last week. And while there is virtually no chance of a rate change on 3/18, all of the later meetings in 2020 are still showing a relatively small chance of a rate cut (red box).

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Outlook:

Despite the SPX rallying 12.5% since the US/China phase 1 trade agreement was first announced back on 10/11/2019, traders were just as eager to buy when the deal was finally signed this week. But valuations are stretched, complacency is high and caution flags are beginning to wave.  

Bottom Line:

Last week I said, “…the VIX IV Gap (which tends to be one of the earliest and shortest-term indicators) indicates the potential for at least a modest volatility spike, probably in the first part of the week…” After the VIX closed at 12.56 on Friday (1/10), the biggest intraday move all week didn’t even reach 14, so the spike never really happened. However, with an SPX gain of more than 1.6%, the “Moderately Bullish” outlook was on target.

As you can see below, virtually all of the changes in the indicators this week were downgrades. Additionally, the only remaining Moderately Bullish indicators are those that reflect activity of retail traders, who tend to be more reactive than proactive. Therefore the primary outlook for next week is Moderately Bearish. Additionally, with volatility so low (and complacency so high) any downturn is likely to be met with more volatility, so a secondary outlook of Volatile is clearly warranted. And as usual, the standard caveat still applies; “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.