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Weekly Market Review:
The regular Q4 earnings season is going strong. This week, 103 S&P 500 companies reported Q4 earnings and 83 of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.
Overall, 169 (34%) of the companies in the S&P 500 have reported Q4 results. Below are the aggregate beat rates relative to the final results from recent quarters.
Quarter EPS beats Rev beats
Q4 ’21 77% 68%
Q3 ‘21 82% 68%
Q2 ‘21 86% 83%
Q1 ‘21 87% 72%
Q4 ’20 78% 69%
Q3 ‘20 84% 74%
Q2 ‘20 85% 65%
Q1 ‘20 65% 59%
Q4 ’19 74% 64%
Q3 ‘19 78% 58%
Q2 ‘19 76% 56%
Q1 ‘19 77% 57%
Q4 ’18 73% 60%
Q3 ’18 82% 61%
Q2 ‘18 84% 72%
Q1 ‘18 81% 74%
Average 79% 66%
From a growth standpoint, Q4 earnings are +29.8% y/o/y so far versus a +21% estimate when the quarter ended. Q4 revenue is +15.9% y/o/y so far versus a +13% estimate when the quarter ended. This compares to actual growth of +39.1% and +17.4% respectively in all of Q3.
Better (or higher) than expected:
- Case-Shiller Home Price Index for Nov: +18.29% vs. +18.00% est
- Consumer Confidence for Jan: 113.8 vs. 111.2 est
- New Home Sales for Dec: 811k vs. 760k est
- GDP for Q4: +6.9% vs. +5.5% est
- Initial (weekly) Jobless Claims: 260k vs. 265k est
- Employment Cost Index (ECI) for Q4: +1.0% vs. +1.2% est
- Personal Spending for Dec: -0.6% vs. -0.6% est
- Personal Consumption Expenditures (Core PCE) for Dec: +0.5% vs. +0.5% est
Worse (or lower) than expected:
- Durable Goods Orders for Dec: -0.9% vs. -0.6% est
- Pending Home Sales for Dec: -3.8% vs. -0.4% est
- Personal Income for Dec: +0.3% vs. +0.5% est
- University of Michigan Consumer Sentiment for Jan: 67.2 vs. 68.8 est
This was a moderate week for economic data, and probably the biggest surprise was the first (advance) report on Q4 GDP, which came in 1.4 percentage points above the estimate and well above the +2.3% level in Q3. Keep in mind that this is a seasonally adjusted annual rate. The 4-quarter average is now +5.6%. Equity markets didn’t move much on this data and I suspect it was because according to the Bureau of Labor Statistics (BLS), 4.9% of this GDP number was due to increasing inventories; mostly automobiles.
Source: Schwab Center for Financial Research
Past performance is no guarantee of future results.
Market Performance YTD
Here is the 2022 YTD (versus 2021 full-year) performance of the market broken down by the 11 market sectors (as of the close on 1/27/22):
2022 YTD 2021 Final Category
- Energy +19.2% +47.7% Defensive
- Financials -2.2% +32.5% Cyclical
- Cons Staples -3.1% +15.6% Defensive
- Utilities -6.2% +14.0% Defensive
- Industrials -6.4% +19.4% Cyclical
- Materials -8.7% +25.0% Cyclical
- Healthcare -9.4% +24.2% Defensive
- Communications Svc -11.2% +20.5% Defensive
- Real Estate -12.6% +42.5% Cyclical
- Info Tech -13.1% +33.4% Cyclical
- Consumer Disc -15.0% +23.7% Cyclical
Source: Bloomberg L.P.
Past performance is no guarantee of future results.
Here is the 2022 YTD (versus 2021 full-year) performance of the major U.S. equity indices (as of the close on 1/27/22):
2022 YTD 2021 Final Forward P/E Ratio
- S&P 500 (SPX) -9.3% +26.9% 19.6
- Nasdaq Composite (COMPX) -14.7% +21.4% 27.2
- Dow Industrials (DJI) -6.0% +18.7% 18.1
- Russell 2000 (RUT) -14.0% +13.7% 21.5
While the SPX has fallen “only” 71 points (-1.6%) this week, the intra-day volatility has been huge. The top-to-bottom range has been well over 100 points in each of the first 4 sessions, and is over 95 points as I’m writing this (mid-day Friday 1/28). I believe I can confidently say that last week’s outlook of “Volatile” was right on the mark. You may also recall that last week I mentioned that the VIX IV Gap and the SPX OIPCR were both pointing to a possible bounce on Monday (1/24); it turns out they were correct. But it was also a short-lived bounce as Monday was the only day that finished on a higher note.
As you can see, the SPX attempted to break out above the 200-day SMA (4,434) on both Wednesday (1/26) and Thursday (1/27) but was thwarted both times by late-afternoon selling. More concerning however is that the SPX also broke below the -10% line intra-day in all 5 sessions, yet somehow managed to close above correction territory each time; as I’m writing this mid-day Friday it’s just below it. If it does close in correction territory (below 4,316), the next support is unlikely to arrive until it reaches Monday’s low (4,222). That’s -12% from the 1/3/22 close. A breakout is almost certainly coming soon; it’s just a matter of which direction.
Source: StreetSmart Edge®
Past performance is no guarantee of future results.
As I stated last week, January is always a big expiration month because equity and ETF LEAPs options expire in January. That fact combined with a market that appeared to be heading into correction territory sparked the two highest volume days in the history of the options industry. 63.5M contracts traded on Friday (1/21) as the old contracts expired and 63.7M contracts traded on Monday (1/24) as replacement contracts were added. The only other day ever to exceed 60M contracts was 1/27/21. As a result, January option volume is averaging a very robust 44.8M contracts per day. That is well above the final December level of 38.7M, and just above the January 2021 level of 44.4M contracts per day. As a reminder, November’s 45.2M per day level was the busiest month for options trading ever.
The following data comes from the Chicago Board Options Exchange (Cboe) where about 98% of all index options, about 20% of all Exchange Traded Product (ETP) options, and about 15% of all equity options are traded:
In reviewing the VIX OI Change for the past week I observed the following:
- VIX call OI was +17.3%
- VIX put OI was +92.3%
Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These very sharp increases reflect replacement activity following the January contract expiration on Wednesday (1/19). However there is an extremely strong bias toward the put side, so I see the VIX OI Change as bullish for the market in the near-term.
As a result of the January monthly contract expiration on Friday (1/21), the follow changes are calculated from Monday (1/24) instead.
In reviewing the SPX OI Change for the past week I observed the following:
- SPX call OI was +11.5%
- SPX put OI was +6.9%
While SPX volume tends to be mostly institutional hedging, these changes reflect a clear bias toward the call side, so I see the SPX OI Change as bullish for the market in the near-term.
In reviewing the ETP OI change (which includes SPY, QQQ, DIA & IWM) for the past week I observed the following:
- ETP call OI was +11.1%
- ETP put OI was +9.2%
The aggregate changes in Exchange Traded Products reflect a small bias toward the call side, so I see the ETP OI Change as moderately bullish for the market in the near-term.
In reviewing the Equity OI Change for the past week I observed the following:
- Equity call OI was +10.2%
- Equity put OI was +9.3%
Equity volume tends to have a large retail component to it. These changes reflect a small bias toward the call side, so I see the Equity OI Change as moderately bullish for the market in the near-term.
Index OI Participation is +16.2% versus 2021 levels, so I see it as bullish in the long-term.
Equity/ETF OI Participation is +6.0% versus 2021 levels, so I see it as moderately bullish in the long-term.
Open Interest Put/Call Ratios (OIPCR):
The VIX OIPCR is up 31 ticks to 0.78 versus 0.47 last week. This ratio tends to move in the same direction as the VIX index, but this massive move is far greater than expected with the VIX only +1.69 (+5.7%) over the last 4 sessions. However, over the past 2 weeks the VIX is +11.30 (+58.9%), so this spike was slightly delayed, probably due to the January contract expiration on 1/19. As a result, I see the VIX OIPCR as bullish in the very near-term for the markets. This ratio is now at its highest level since early December and it is well above the 200-day SMA of 0.63. As a result, I see it as moderately bullish in the long-term for the markets.
The SPX OIPCR is down 12 ticks to 1.91 versus 2.03 last week. This ratio also tends to move in the same direction as the SPX, so this downtick is consistent with the SPX, which has fallen 71.43 points (-1.6%) over the last 4 sessions. As a result, it likely indicates that SPX option traders (who are almost entirely institutional) could be expecting a sizable bounce in the SPX next week. Therefore, I see the SPX OIPCR as bullish in the near-term for the market. This ratio is now 35 ticks below its mid-December high and 30 points below the 200-day SMA of 2.21. I see it as moderately bullish in the long-term.
The normally very stable Equity OIPCR is up 1 tick to 0.80 versus 0.79 last week. This is the highest level for this ratio since mid-September. At this level it implies that equity option traders (which includes a lot of retail traders) are becoming increasingly less bullish. Therefore, I see the Equity OIPCR as moderately bearish in the near-term for the market. This ratio is now above the 200-day SMA (currently 0.78). I see it as still neutral in the long-term.
Cboe Volume Put/Call Ratios (VPCR):
The Cboe VIX VPCR has been moderately bullish for most of the week. The 1.22 reading on Thursday (1/27) was moderately bullish but the current reading of 0.70 as I’m writing this (mid-day Friday 1/28) is neutral. While this ratio tends to decline as the day goes on, I see it as moderately bullish in the very near-term.
The Cboe SPX VPCR has been moderately bearish for most of the week. The 1.77 reading on Thursday (1/27) was moderately bearish, but the current reading of 1.50 as I’m writing this (mid-day Friday 1/28) is neutral. While intraday levels tend to decline as the day goes on, I see it as moderately bearish in the very near-term. With a 5-day moving average of 1.71 versus 1.76 last week, I see it as moderately bearish in the long-term too.
The Cboe Equity VPCR has been neutral for most of the week. The 0.70 reading on Thursday (1/27) was neutral, but the current reading of 0.94 as I’m writing this is moderately bearish. Since this ratio tends to decline as the day goes on, I see it as neutral in the very near-term. With a 5-day moving average of 0.67 versus 0.63 last week, I see it as now neutral in the long-term too. This is the first neutral reading on this ratio in 16 months. As noted below, long-term for this ratio is about a week or two.
Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week or two.
OCC Volume Put/Call Ratios (VPCR):
The OCC Index VPCR has been bearish (>1.40) most of the week. As a result, I see it as bearish in the near-term. It has been bearish in 14 of the last 18 sessions, so I see it as bearish in the long-term.
The OCC Equity VPCR has been all over the map this week. Therefore, I see it as volatile in the near-term. With a 5-day average of 0.90 versus 0.85 last week, it is moderately bearish in the long-term. This is the first moderately bearish reading on this ratio in 21 months.
Cboe Volatility Index (VIX)
At the time of this writing (mid-day Friday 1/28), the VIX is -0.70 to 29.79. At its current level, the VIX is implying intraday moves in the SPX of about 68 points per day (this was 63 last week). The 20-day historical volatility is 118% this week versus 118% last week. The VIX is well above its long-term average (19.54) and well above its long-term mode (12.42) which I consider to be “normal” volatility. However, it is nearly 10 points lower than its intra-day high on Monday (1/24) so I see the VIX as moderately bearish in the very near-term for the equity markets. The VIX has been quite elevated for nearly 3 weeks now, so I see it as moderately bearish in the long-term.
On a week-over-week basis, VIX call prices are little changed while VIX put prices have fallen just slightly. At -63 versus -69 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is only slightly lower. At this level it is bullish in the very near-term. The VIX IV Gap widened early in the week and then narrowed again in the latter part of the week, so I see it as still volatile in the long-term.
Keep in mind, this is not only a contrarian indicator most of the time, it tends to be one of the earliest and shortest-term indicators I discuss in this report, so it can also change directions very quickly.
As of this writing (mid-day Friday 1/28) the nearest VIX futures contract (which expires on 2/2) was trading at 29.25; very close to the spot VIX level of 29.79. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 28.69; about 1 point below the spot price.
With the VIX quite elevated at the moment and an adjusted level that is only about a point below the spot price, futures traders are indicating that they believe the VIX is likely to drop very little over the next few days. Therefore, I see VIX futures as neutral in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 26.58 and 24.97 respectively. With the RPAPs of the further-dated contracts both still above average but well below the spot price, I see VIX futures as moderately bullish in the long-term for the SPX.
Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.
With the VIX up only about 2 points this week, the VIX Hedging Effectiveness has been Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing some sensitivity to market volatility, and maybe slightly effective as hedging tools in the very near-term. VIX Hedging Effectiveness is 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.
As Schwab’s cryptocurrency analyst, almost every week I receive a number of interesting questions from colleagues and clients, and it occurred to me that this might be a good place to share some of them. Here is one I received this week:
Q: I have read that the last bitcoin will be mined in the year 2140, which I assume is an estimate based upon current levels of transactions. Who pays the transaction fees after that point?
A: The bitcoin blockchain code automatically “releases” 1 new bitcoin every 10 minutes, so the mining speed can’t exceed the availability, no matter how fast the technology improves. When bitcoin changes hands, a small fraction of the transaction is deducted and this deduction varies based on the “traffic” in the blockchain (more traffic = higher cost), and the speed with which the two parties want the transaction to be settled (faster settlement = higher cost). A relatively slow transaction that settles in a few days can typically be done at the cost of about 2 satoshis. A satoshi is the price of bitcoin divided by 100 million. At today’s price of $34,000 per bitcoin that equates to about 34/1000 of 1¢ or $0.0003. So even if no more bitcoin are created, miners who settle blockchain transactions will still receive this fee. In order to make receiving the fee worthwhile, technology and the energy used to run it will likely need to become much more efficient in the future. Of course 118 years in the future, it’s likely that it will.
For Schwab’s perspective on cryptocurrencies, please visit: www.schwab.com/cryptocurrency
Economic reports for next week:
Chicago PMI – This report is a gauge of business conditions within manufacturing and service firms in the Chicago area. A reading above 50 indicates expansion and a reading below 50 indicates contraction.
Construction Spending – Construction spending measures new overall construction activity. This report can predict future activity in housing and commodities, which can be a sign of economic growth.
ISM Manufacturing Index - The Institute for Supply Management (ISM) Manufacturing Index tracks economic data from companies in the manufacturing sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the manufacturing sector are on the rise.
ADP Employment Change – The ADP report is based on information from approximately 400,000 U.S. businesses and 23 million U.S. employees in the private sector. While the ADP report is often looked at as a predictor of the BLS (Bureau of Labor Statistics) nonfarm payrolls report, ADP data does not include government jobs, so there is sometimes a significant difference between the two.
Initial Jobless Claims - For the week ending 1/22/22, claims were down 30k after being up 59k the prior week. The 4-week moving average now stands at 247k, up 15k from the prior week.
Nonfarm Productivity – This report measures the efficiency of the work required to produce a product or provide a service, and is an important component in overall employment trends and corporate profit margins. However, it has been quite volatile historically and typically has little impact on the market.
Unit Labor Costs – This report measures the aggregate total of all wages paid to employees plus the benefits and payroll taxes paid by the employer. This lagging economic report usually has very little impact on the market.
Factory Orders – This report includes both durable and non-durable goods orders, as well as wholesale and retail inventories. Like the construction report, it usually doesn’t impact the market much.
ISM Services Index – The Institute for Supply Management (ISM) Non-Manufacturing Index tracks economic data from companies in the services sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the services sector are on the rise.
Monthly Employment Situation – This is the biggest group of reports each month. It includes:
- Nonfarm Payrolls
- Unemployment (U-3) Rate
- Average Hourly Earnings
- Average Workweek
- Underemployment (U-6) Rate
- Labor Force Participation Rate
The FOMC had a regularly scheduled meeting on Wednesday (1/26), and given that the Fed Funds Futures probability of an interest rate hike at that meeting was only about 5%, it didn’t happen. However, that doesn’t mean the meeting was unimportant; quite the contrary. In the post-meeting press conference, Chair Powell all but explicitly stated that an aggressive monetary tightening campaign will begin following the next meeting on March 16th, followed by a reduction program to trim the Fed’s balance sheet. Shortly after the announcement, the U.S. dollar rose to a 16-month high and the 10/2 Treasury yield curve flattened to its lowest point in 14 months.
The probability of an interest rate hike in March has risen from 99% last week to 118%. Of course no probability can exceed 100%, but I think it’s safe to say that it will happen. Interest rates on the 10-year treasury ($TNX) have risen this week; from 1.73% on Monday to 1.85% on Wednesday (1/26) before falling back to about 1.78% at the time of this writing (mid-day Friday 1/28).
Volatility is likely to remain high and intraday swings could continue, but many of the indicators are pointing to a possible bullish move next week.
As I began to compile the indicators this week, I was quite surprised at how many of them were in the bullish camp. Sometimes the indicators provide an outlook that feels a little uncomfortable but when it does, more often than not it has turned out to be right. This is also a good time to reiterate that the point of this report is not to provide my personal outlook on the market, but rather to decipher the activity of key market participants and interpret their collective outlook based on historical patterns. Often that activity provides insight; sometimes is doesn’t. Sometimes market participants get it completely wrong.
As you can see below, most of the changes this week were in a more bullish direction and some of them have turned fully bullish. But because not all of the indicators cover the same timeframe, many of them are still bearish or volatile. Given this makeup and the above comments, next week may continue to be Volatile for a while, but in the end it may also be Bullish.
In any case, be on the lookout for potentially more large intraday swings throughout the week, and be extremely careful if you intend to buy the dips.
Past performance is no guarantee of future results.
OI = Open Interest
OIPCR = Open Interest Put/Call Ratio
VPCR = Volume Put/Call Ratio
IV = Implied Volatility
+ means this indicator has changed in a bullish direction from the prior posting.
– means this indicator has changed in a bearish direction from the prior posting.
+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.
^ means this indicator is at a historical extreme that has often (though not always) preceded a market reversal.