Daily Summary – May 11, 2021 - Are We Done?

Daily Summary – May 11, 2021 - Are We Done?

US equities ended a volatile day in mixed fashion with a huge comeback in growth stocks as value shares pulled back less for the most part intra-day but didn't recover much (for the most part) by day's end.  The end result was the Naz and NDX just barely red, the RUT down a quarter of a percent and the SPX lagging down almost nine tenths (but recovering from much deeper levels, although not as deep as the RUT which was down 2.5% at one point or the Naz which was down nearly that much). 

And some stocks made absolutely massive recoveries.

The recovery was not entirely unexpected.  In fact, in my morning missive I mused "This puts the SPX beneath its 20-DMA and just above its May lows and the Naz and NDX beneath their 100-days into an area beneath which they've bottomed at the last few pullbacks.  Here's a one-year chart of NDX futures.  Might we get the bounce from here?  Definitely possible.  Let's see how the day progresses."

Well, that bounce is exactly what we got, but as you can see that doesn't mean we're out of the woods.  Here's a close-up of that last time 

As you can see, it took a few days for us to bottom, and I don't see any reason not to expect that.  Particularly when looking at the technical condition of the indexes which we'll do below.  

Style box reflects the above, a change of pace from what we've seen of late.

But before we move on a quick note on what happened.  I've referred to hedge funds that buy based on levels and/or conditions in the market such as where volatility is, etc.  It appears we hit a big trigger last day or two that caused a lot of those buyers to flip to sellers.  Here's some information from Heisenberg Report on that:

Dealer positioning in QQQ currently means directional moves have the potential to be exacerbated by hedging flows. Charlie McElligott of Nomura flagged an “extremely negative $Gamma reading” that ranks in just the 1.5%ile, and an “explosion” lower in net Delta.

The result, in short, was a deleveraging event into yesterday's decline, which in layman's terms means that these dealers shed basically all of their longs simultaneously.  In more complicated terms, “Overall [that] turned the multi-year legacy ‘+100% Long’ signal across all horizons down to just ‘+4.1% Long,’ implying ~$10.7B of notional selling in NQ futs in the deleveraging,” 

Here's what that looks like.

In addition to that $10.7B, volatility sellers (they reduce risk as volatility rises) and trend followers (self-explanatory) added another $2.8B.  And that, my friends, is how you have a two day 5% drawdown happen.  And be assured it will continue to happen from time to time.  The big question is whether they're done.

Major Market Technicals

While there was recovery, all of the indices ended up just below an important resistance level.  SPX is 20-DMA, NDX is 50-DMA, Naz is 100-DMA, and RUT is yesterday's low at 2212.  This is one of the things that gives me some pause as to tomorrow's open.

SPX Sector Flag

Ugly SPX sector flag with just one green sector (materials).  Eight sectors down at least 0.83% with energy the only down over 2%. 

SPX Sector Technicals

Despite the selloff.  Not a ton of changes on the sector charts but a lot of sectors fell to support.  Utes fell under 20-DMA as did comm's.

Subsectors

Semi's and bios were green (XBI up over 1%) while transp, homebuilders, and retail were red, with homebuilders in particular selling off down almost 3.5%.  

Breadth

Breadth was about what you'd expect given where the indices closed (which is positive I think), at least in terms of volume.  Naz had 51% of volume positive and NYSE 40%.  So there was some real buying behind the recovery.  Issues not nearly as good though at 36 and 25% respectively.  Luckily, I put less emphasis on issues, so I think this is consistent with a bottoming process.

Commodities/Currencies/Bonds

Bonds - Yields recovered a bit further from Friday's big selloff and recovery with 10-yr yield edging over the 50-DMA to a trendline that we'll see if it can get through.

Dollar - Flat just holding on to that 90 level DXY.

Crude - All over the place today sort of following equities ending in the green after testing and bouncing off 50-DMA.

API out after the close showing another large draw.  Would imagine this will not be the case next week with the refinery cuts.

Mentioned OPEC+ monthly report this morning that lowered its expectations for US production, and EIA out today reiterates that conclusion.

While dropping its demand forecast slightly - EIA cuts the 2021 oil demand growth estimate to 5.42mbpd (was 5.50mbpd) and raises the 2022 demand growth estimated to 3.73mbpd (was 3.65mbpd).  EIA estimates the oil market was oversupplied by 1.97mbpd (was 2.07mbpd) in 2020 and projects an undersupplied market of 0.97mbpd (was -0.99mbpd) in 2021 and of 0.04mbpd (was -0.20mbpd) in 2022.

Given those low expectations for US supply, the "call on OPEC" (how much OPEC needs to produce to keep the market in balance) is substantial.

As Canada gets involved in the Line 5 dispute between Michigan and Enbridge.

Nat Gas - After looking like it might trade out of its recent range this morning, pops back in and continues to hover just under the $3 mark with a red day.

Gold - After selling off in the morning recovered with stocks and continues to test the underside of the 1850 level and its downtrend line.  

Copper - Similarly recovered from morning losses to finish green.

VIX - Mentioned this morning I thought the 200-DMA would be resistance and that was accurate as it peaked there before falling off to finish solidly up but now firmly in the 20's. 

And we have two extra commodities today going in different direction.  First is soybeans.

And second is lumber.  While maybe we're seeing the other side of the parabola?

U.S. Data

NFIB was in the morning missive.  

Also wrote on JOLTS today.  

8.123M March Job Openings vs. 7.455M consensus and 7.526M prior - Record high for job openings - Details https://sethiassociates.blogspot.com/2021/05/8123m-march-job-openings-vs-7455m.html

With respect to JOLTS here's an interesting stat.

Also out today was the Dodge Momentum Index which measures CRE projects. It posted a big gain.  Data from the report is below.

The Dodge Momentum Index posted an 8.6% gain in April, climbing to 162.4 (2000=100) from the revised reading of 149.5 in March. The Momentum Index, issued by Dodge Data & Analytics, is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. April’s gain marks the fifth consecutive monthly increase, and similar to February and March, was due to a large increase in institutional buildings entering the planning stage while commercial planning eased by less than one percent.

Since hitting its nine-year low in January, institutional planning has rebounded substantially, climbing 77% over the last three months. Healthcare and laboratory projects continue to dominate the sector, pushing institutional planning 50% higher on a year-over-year basis. Conversely, the commercial component has slipped in recent months as fewer warehouse projects have entered planning, though the sector is 21% higher than in April 2020. Overall, the Momentum Index is 31% higher than last April, which was the first full month of COVID-19 shutdowns.

Next 24

Overnight we'll get a variety of int'l data including a lot from the UK plus EU IP and country CPI's followed by April CPI and weekly EIA and mortgage apps reports in the US.

In earnings the big dog is TCHEY (Tencent) which headlines a session filled with ADR's and small growth companies like DOX, LITE, etc.

Overall

I said a couple of weeks ago that I expected us at some point to make it to the 100-DMA on the Naz and 50-DMA on the SPX this earnings season.  We got the former at this point but not the later, although it came reasonably close today.  That could be close enough, but I think we're not done with the volatility just yet.  While we might have seen the lows (particularly on the Naz) per my note at the top, we generally see at least some volatility around the bottom, which I think could happen next couple of days.  And I still think it's at least 50/50 that we see a deeper pullback then what we've seen that really induces some panic and gets the VIX over the 200-DMA.

Last earnings

SPX

Misc

Some other random stuff from today. 

Starting to see some caution creep in.

Another large reverse repo.  Still not sure why all the sudden demand.

Unfortunately it appears that drivers are making things worse by making a run on gasoline.  Lots of tweets on this today.

But hopes for a Wednesday restart.

Although it won't be quick to get to the Northern areas.

While traders raise their bets that first EU rate hike comes from the Eastern bloc.

As breakevens rise in Europe (although well behind the US).

And I noted German ZEW this morning, but looking at the composites, it's interesting that it's the flip of the US where current situation is doing great and expectations are lagging.  Imagine this will also flip as they reopen.

And Tim Cook is headed to court.

As rocket attacks in Israel continue.

And one hits a pipeline.

As WH officially reviews Venezuela sanctions.

And, finally, I've mentioned that one of the positives to emerge from this pandemic is the pull forward of medical technology.  Think this will have huge impacts in the future.

To see more content, including summaries of some of today's economic reports and my morning and nightly updates go to https://sethiassociates.blogspot.com