Weekly Trader’s Outlook

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Weekly Market Review:

Earnings Summary

Q4 earnings activity picked up a bit this week, but has not yet kicked into high gear. With only 68 (14%) of the companies in the S&P 500 reporting results, below are the beat rates for Q4 relative to the final results from recent quarters. Don’t extrapolate these results just yet, as it is still early in the season.

Quarter            EPS beats        Rev beats

Q4 ’20            86%                 74%    

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%

Q4 ’17              78%                 76%    

Q3 ’17              78%                 68%    

Q2 ‘17              77%                 69%

Q1 ’17              78%                 63%

Average          78%                 65%

From a growth standpoint, Q4 EPS has been -0.6% y/o/y; better than analysts’ expectation of -9.7% when the quarter ended. Q4 revenue has been +0.1% y/o/y. This compares to -7.0% and -1.2% respectively in all of Q3. Below are some of the higher-profile companies that reported earnings this week.  

Earnings Recap

Symbol            Actual  Estimate

GS                   12.08    7.31

BAC                 0.59      0.55

NFLX              1.19      1.38

UNH                2.52      2.41

PG                   1.64      1.51

MS                   1.92      1.29

AA                    0.26      0.11

DFS                 2.59      2.40

UAL                -7.00    -6.65

FITB                 0.87      0.68

INTC                1.42      1.11

CSX                  0.99      1.00

PPG                 1.59      1.57

IBM                  2.07      1.79

ALLY                1.58      1.06                             

Economics Recap

Better (or higher) than expected:

• Initial (weekly) Jobless Claims: 900k vs. 935k est
• Housing Starts for Dec: 1,669k vs. 1,560k est
• Building Permits for Dec: 1,709k vs. 1,608k est
• Existing Home Sales for Dec: 6.76M vs. 6.56M est

On Target:

• None

Worse (or lower) than expected:

• NAHB Housing Market Index for Jan: 83 vs. 86 est

This was a relatively light week for economic data. At 900k, Initial Jobless Claims came in below the 935k estimate, and below last week’s 926k level. Claims are now averaging 850k for the past 4 weeks. Aggregate initial jobless claims over the past 44 weeks (since the virus hit) now exceed 75M and continuing claims still exceed 5.0M (was 1.7M pre-virus).

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Market Performance YTD

Here is the 2021 YTD (versus 2020 full-year) performance of the market broken down by the 11 market sectors (as of the close on 1/21/21):

                                                            2021 YTD                     2020 Final

1. Energy                                      +11.5%                         -37.3%
2. Consumer Disc                         +5.4%                          +32.1%
3. Healthcare                                +3.8%                          +11.4%
4. Financials                                 +3.5%                          -4.1%
5. Materials                                   +3.2%                          +18.1%
6. Info Tech                                  +2.4%                          +42.2%
7. Communications Svc              +1.8%                          +22.2%
8. Industrials                                 +0.4%                          +9.0%
9. Real Estate                               +0.3%                          -5.2%
10. Utilities                                     +0.0%                          -2.8%
11. Cons Staples                            -3.5%                           +7.6%

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2021 YTD (versus 2020 full-year) performance of the major U.S. equity indices (as of the close on 1/21/21):

                                                            2021 YTD                     2020 Final

• S&P 500 (SPX)                             +2.6%                          +16.3%
• Nasdaq Composite (COMPX)   +5.0%                          +43.7%
• Dow Industrials (DJI)                 +1.9%                          +7.2%
• Russell 2000 (RUT)                  +8.5%                          +18.4%

Technicals

As if we didn’t have enough overbought caution flags out there; here is another one. Notice below that the gap between the level of the SPX and its 200-day Simple Moving Average (SMA) is at a level similar to the last 3 pullbacks. The last time this gap was >14% for any length of time was August 2009. That was when the 200-day SMA turned up following the financial crisis bear market bottom, in March 2009. Likewise, the point gap between the 50-day SMA and the 200-day SMA on the SPX is currently the highest ever.

The pause in the market last week, essentially ended when inauguration day occurred with virtually no violence in Washington DC. As a result, the SPX closed at a new high on both Wednesday (1/20) and Thursday (1/21). As a result, the closing level on Thursday (3,853) becomes the new upside resistance level. To the downside it remains 3,645 (the intraday high from 11/9).

Source: StreetSmart Edge^®

Past performance is no guarantee of future results.

2009-10 Roadmap

With the SPX closing at a new high on Thursday (1/21), it is up a rather substantial 72.2% since the COVID-19 bear market low (3/23/20). And since the largest pullback we’ve had since late-October has been less than -1.5%, I continue to feel uneasy about the next section of the 2009-10 roadmap (green line). This could be the point where the divergence finally happens, but I’ve been thinking that for 8 straight months, and it hasn’t happened.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Presidential Performance

President Biden is off to a great start; the SPX is +14.3% since Election Day. I always base these calculations on election day (not inauguration day) because that's when the market begins to react to a new president. If you look at virtually any chart during an election year, you’ll understand. By comparison, President Trump was +6.2% on inauguration day 2017.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Option Volumes:

Following the January monthly and annual equity Leaps expiration on Friday (1/15) option volume is averaging an exceptionally high 41.8M contracts per day. That is above the December level of 34.4M contracts per day (the highest month ever) and well above the January 2020 level of 24.8M contracts per day. There is a very good chance that January will set another new volume record.

With 50.8M aggregate contracts traded, Friday (1/15) was the highest option volume day ever. By comparison, only 37.9M contracts traded on Tuesday 1/19.

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 -30.0%             
• VIX put OI was -25.0%             

These sharp declines are due to the January monthly contract expiration on Wednesday (1/20) and are therefore N/A for the market next week.  

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

• SPX call OI was -12.7%            
• SPX put OI was -15.6%            

These sharp declines are due to the January monthly contract expiration on Friday (1/15) and are therefore N/A for the market next week. As a result, I viewed only the changes since Tuesday (1/20) and observed the following:

• SPX call OI was +3.3%
• SPX put OI was +1.6%             

These changes reflect a small bias toward the call side, so I see them as moderately bullish for the market next 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 -27.8%                        
• ETP put OI was -29.3%            

These sharp declines are due to the January monthly contract expiration on Friday (1/15) and are therefore N/A for the market next week. As a result, I viewed only the changes since Tuesday (1/20) and observed the following:

• ETP call OI was +2.2%             
• ETP put OI was +2.5%             

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

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 -27.7%                     
• Equity put OI was -36.0%                     

These sharp declines are due to the January monthly contract expiration on Friday (1/15) and are therefore N/A for the market next week. As a result, I viewed only the changes since Tuesday (1/20) and observed the following:

• Equity call OI was +3.8%                      
• Equity put OI was +3.6%                      

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 -21% versus 2020 levels, so I see it as bearish in the long-term.

Equity/ETF OI Participation is +37% versus 2020 levels, so I see it as bullish in the long-term.

A substantial number of options expire in January each year, due to the expiration of Leaps (long-term) contracts. All equity and many ETF Leaps expire in January. On Thursday 1/14, aggregate equity/ETF option open interest hit an all-time high of 418M contracts. After expiration on Friday (1/15) the open interest fell to less than 300M contracts. While the percentage drop was similar to previous years, the open interest was substantially higher. By comparison, in January 2020, the equity/ETF open interest dropped from 316M to 206M; in 2019 it went from 314M to 196M.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is up 7 ticks to 0.97 versus 0.90 last week. At this time, VIX options traders are holding (long or short) 97 puts for every 100 calls. Historically, this ratio tends to move in the same direction as the VIX index, so the fact that it is up sharply this week is surprising given the VIX index was -3.00 (-12.4%) through Thursday (1/21). However, there is little doubt this unusual move is being greatly exaggerated by the monthly contract expiration on Wednesday (1/20). In any case, even a modest increase likely implies that VIX option traders may be expecting the VIX to fall in the near-term. Therefore, I see the VIX OIPCR as moderately bullish in the very near-term for the markets. This ratio is now above the 200-day SMA of 0.90, so I see it as moderately bullish in the long-term.

The SPX OIPCR is down 4 ticks to 2.03 versus 2.07 last week. This ratio remains well above the 200-day SMA of 1.82, and it is now several ticks below the recent 10-month high. This ratio tends to move in the same direction as the SPX, so the fact that it has fallen this week when the SPX has risen 84.82 points (+2.3%) through Thursday (1/21), is surprising. However, like the VIX ratio, there is little doubt this move is being exaggerated by the monthly contract expiration on Friday (1/15), especially since the SPX hit its most recent all-time high on Thursday (1/21). As a result, it likely indicates that SPX option traders (who are almost entirely institutional) now have fewer concerns about a large SPX downturn in the near-term. Therefore, I see the SPX OIPCR as neutral in the near-term for the market. Given that this ratio is still quite high historically, I see it as still moderately bearish in the long-term.

The normally stable Equity OIPCR is down 7 ticks 0.76 versus 0.83 last week. Again, this ratio is being greatly exaggerated by not only the monthly contract expiration, but also the annual equity Leaps expiration on Friday (1/15). That said, the last time it dropped to this level was following the 2016 Leaps expiration, so clearly this is a substantial move. Since this ratio was already at an extreme level that has often (though not always) preceded a pullback, it is now even more extreme. Clearly many (mostly retail) traders are not expecting, nor are them prepared for, a pullback. Therefore, I see the Equity OIPCR as still bearish in the near-term for the market. However, since any pullback is likely to be relatively short-lived and it remains below the 200-day SMA of 0.86, I see it as bullish in the long-term.

Cboe Volume Put/Call Ratios (VPCR):

The Cboe VIX VPCR has moved from neutral to moderately bullish this week. The 1.20 reading on Thursday (1/21) was moderately bullish and the current reading of 0.88 as I’m writing this (mid-day Friday 1/22) is neutral. Therefore, I see it as neutral in the very near-term.

The Cboe SPX VPCR has been moderately bearish this week. The 2.10 reading on Thursday (1/21) was moderately bearish but the current reading of 1.55 as I’m writing this (mid-day Friday 1/22) is neutral. Since intraday levels tend to decline as the day goes on, I see it as neutral in the very near-term. With a 5-day moving average of 1.79 versus 1.83 last week, it is moderately bearish in the long-term.

The Cboe Equity VPCR has been in extremely bullish territory this week. The 0.40 reading on Thursday (1/21) is an extreme level that can sometimes be a signal of a near-term market pullback, though the current reading of 0.50 as I’m writing this (mid-day Friday 1/22) is bullish. Intraday levels on this ratio tend to fall as the day progresses, so I see it as bearish in the very near-term. With a 5-day moving average of 0.40 versus 0.38 last week, it is also at a longer-term extreme, which mean bearish in the long-term. As noted below, long-term for this ratio is about a week or two.

Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week or two.

ISE Retail Sentiment Index (ISEE):

The ISEE has been moderately bullish this week; closing modestly above 100 all 3 days. 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 131, I see the ISEE as moderately bullish in the near-term. Since this ratio has now been above 100 in 15 of the last 16 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 (>1.10), to bearish (>1.40) this week. As a result, I see it as bearish in the near-term. It has been bearish and moderately bearish about an equal amount over the past 4 weeks, so I see it at moderately bearish in the long-term.

The OCC Equity VPCR has been bullish (<0.63) all week. Since this potential warning signal has moderated just a bit since last week, I see it as bullish in the near-term. Additionally, since the 5-day average has also moderated a bit, I see it as bullish in the long-term too.

Volatility:

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 1/22), the VIX is up a quarter point in the mid-21 range. At its current level, the VIX is implying intraday moves in the SPX of about 43 points per day. The 20-day historical volatility is 109% this week versus 120% last week. The VIX remains well above its long-term mode (12.42) and modestly above its long-term average (19.54). With the SPX higher and the VIX lower this week overall, I see the VIX as moderately bullish in the very near-term for the equity markets. And though it remains above its long-term average, I see it as neutral in the long-term for now.

On a week-over-week basis, VIX call prices are slightly higher and VIX put prices are lower. At +161 versus +43 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) has increased a lot, and as a contrarian indicator, at this level it is moderately bearish in the very near-term. Call prices have been rising for the past 2 weeks now, whereas put prices have been declining for about 3 weeks. Therefore, I see the VIX IV Gap as now moderately bearish in the long-term.

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

VIX Futures

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 3.05 versus 3.80 last week. This small decrease is mostly due to the expiration of the January monthly futures contract on Wednesday (1/20).         

As of this writing (mid-day Friday 1/22), the nearest VIX futures contract (which expires on 1/27) was trading at 23.95; more than 2 points above the spot VIX level of 21.56. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 23.49; still nearly 2 points above the spot price.

With an adjusted level that is well above the spot price, futures traders are indicating that they believe the VIX is likely to rise over the next few days. Therefore, I see VIX futures as moderately bearish in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 23.13 and 23.19 respectively. With the RPAPs of the further-dated contracts both more than 1½ points 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.

Even though the VIX has edged lower this week, the VIX Hedging Effectiveness remains 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 are likely to be at least 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.

Global Review/Outlook:

Asia

This week China reported that 840k (of 24M) residents in Shanghai have been vaccinated thus far, and it has also implemented a travel ban due to the appearance of 6 new cases, following two months without any cases. Separately, on inauguration day China imposed sanctions on several former Trump administration officials including Secretary of State Mike Pompeo, National Security Advisor Robert O’Brien, Trade Advisor Peter Navarro, Advisor Steve Bannon and former National Security Advisor John Bolton. Under the sanctions, none of these individuals are allowed to travel to, or do business with China or Hong Kong.

North America

In a press conference this week, newly elected President Joe Biden warned that despite vaccinations being a key focus for his administration, he expects the pandemic to get worse before it gets better.

In the past week, the US added more than 1.3M new coronavirus cases and more than 21k new deaths. The 5 states with the fastest growing coronavirus infection rates this week are: VT, MS, VA, HI and WA. This week 40 states had reproduction rates below 1.0 (up from only 21 last week). North Dakota and South Dakota with relatively small populations (less than 1M residents each) continue to have the highest per capita rates of infection in the country; 12.7% and 12.0% respectively. The states with the highest death rates per capita remain NJ and NY.

As you can see in the table below, COVID-19 cases worldwide now exceed 97M (up from 93M last week) of which the US accounts for over 24.6M or 25% (unchanged from 25% last week) even though the US only accounts for about 4.3% of the world’s population. At >410k, the US accounts for 20% of all global deaths (up from 19% last week). Sadly, 2 major milestones were reached this week; global deaths surpassed 2M and US deaths surpassed 400k.

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

Europe

This week, the U.K. said its third lockdown could last into the summer, Italy said it is experiencing delays in its vaccine program due to a drop in vaccine supply coming from manufacturers, and Germany said it expects current shortages to last another 6 to 8 weeks. The European Central Bank (ECB) said it believes the Euro area is likely to experience a double-dip recession.

Elsewhere

Brazil, which has about 2.8% of the world’s population, represents 9% of the global cases total (unchanged from 9% last week). India, which has about 18% of the world’s population, has 11% (down from 11% last week) and Russia, which has less than 2% of the world’s population, has 4% (unchanged from 4% last week).  

Economic reports for next week:

Mon 1/25

None

Tue 1/26

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.  

Wed 1/27

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.

FOMC Rate Decision for Jan – Fed Funds Futures indicate a 0% chance of any rate change.

Thu 1/28

Initial Jobless Claims - For the week ending 1/16/21, claims were down 26k after being up 142k the prior week. The 4-week moving average now stands at 850k, up 23k from the prior week. With this increase, the 4-week moving average is now 4,940k below the highest level on record (5.790M), which occurred on 4/18/20.

GDP for Q4 – This is the first estimate (Advance) for Q4 and the consensus estimate is +4.8%, which would be a rather modest increase from the +33.4% in Q3 (which followed -31.4% in Q2).

Leading Economic Indicators for Dec – 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.

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.

Fri 1/29

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.

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.

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.

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.

University of Michigan Consumer Sentiment for Jan – This is the Final report for Jan. At 79.2, the mid-month report was down from 80.7 in the prior month.

Interest Rates:

Since the Fed cut interest rates essentially to zero back on March 15, 2020 there is virtually no chance of any changes in the foreseeable future, so I am suspending the interest rate section indefinitely.

Outlook:

Following the relatively smooth inauguration, some potential pullback signals have abated; though several remain. Anxiety seems to be fading but the market may not be “out of the woods” just yet. Near-term caution is still advised.

Bottom Line:

As you can see below, there were more moves in a bullish direction than in a bearish direction this week, but there is still a substantial amount of disagreement in the indicators. Some potential downturn signals (such as the OCC Equity VPCR) have abated, while others remain. While I’m encouraged the VIX index has fallen, the 2009-10 Roadmap will continue to be a concern until at least the first week of February, as will the large gap between the SPX and the 200-day SMA, and the near-term VIX futures premium.  

As a result, the only logical outlook I can provide for next week with any confidence, is that it will likely be more Volatile than it was this week. Additionally, while there is less conviction in the indicators, I continue to believe that all traders should remain on high alert for a potential pullback of at least 5% in the next week or two, and be patient before buying any dips. As I’ve said numerous times, I believe a warning with no pullback is less dangerous than a pullback with no warning.

Past performance is no guarantee of future results.

Key:

OI = Open Interest

OIPCR = Open Interest Put/Call Ratio

VPCR = Volume Put/Call Ratio

IV = Implied Volatility

+ means this indicator has changed in a bullish direction from the prior posting.

– means this indicator has changed in a bearish direction from the prior posting.

+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.

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