Daily Summary – May 12, 2021 - Now, Are We Done?

 Daily Summary – May 12, 2021 - Now, Are We Done?

I used the header "Are We Done?" yesterday which I answered by saying " 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."

And it was that deeper pullback that we did get as traders already spooked by all of the headlines about runaway inflation were met with a CPI reading that came in 4x estimates (more on that later).  I've noted many times that the issues that I've been harping on such as weak technicals and breadth, overly bullish sentiment, etc., don't mean a selloff is coming, they just mean the support is thin if something comes along that disrupts things.  The inflation headlines and the CPI report were just the kind of thing that with a better backdrop might be shrugged off, but with the support weak, we get what we got today which is the vast majority of stocks falling and most of them falling more than a little.  SPX, NDX, and Naz all fell over 2% and RUT over 3%.  As with yesterday, it was basically a one-way trip downward, bearishly finishing at the lows of the day (with the selling continuing into the after-hours).  As I mentioned yesterday, that's not a great setup for the following day's open.  I had thought we might rally after today's negative open but that clearly didn't happen.  Maybe it will tomorrow.  I definitely think the setup is better as we'll go through below.

Every style box other than large value was down over 2% but even that was down over 1%.  No place to hide in terms of style or size.

Lots of references to March 2020 conditions today.

Major Market Technicals

So I've said from the start of earnings season that I thought we'd get a test of the SPX 50-DMA and we got exactly that today with the index falling right to that level.  Also, the SPX RSI fell to its lowest level since just before the election.  Naz and NDX both broke yesterday's lows, but interestingly both closed just above the 13000 level.  Both RSI's are dipping into oversold territory at lowest levels since March 2020 as is the RUT's.  In terms of price, RUT pulled back to a trendline running back to January (see below).  So basically every index is at some level of price support and is as oversold as it's been in at least 6 months if not longer.

SPX Sector Flag

An even uglier SPX sector flag with again just one green sector (energy) only because of its tie to the inflation story (and some bounceback from yesterday's hammering).  But whereas we had eight sectors down at least 0.83% yesterday and one down over 2%, today TEN sectors were down at least a percent(ish) and SIX were down over 2% (and one over 3%) with five sectors having not a single green stock.  Now that's a selloff. 

SPX Sector Technicals

Starting to get some more support breaks on the sector charts with discr and tech falling below 100-DMAs, health care, RE, and staples 20-DMAs, and comms 50-DMA.  Also several sectors are most oversold they've been on RSI in months while discr and tech are most oversold since March 2020. 

Subsectors

Every subsector I track was red with the least bad (around 1% down) being bios.  Transp was down "only" 2.2% while semi's, homebuilders, and retailers down more like 5%.  Homebuilders are down 10% in two days.  Eesh.  All these subsectors have lowest RSI's in at least several months with semi's lowest since March 2020.

Breadth

Breadth was bad as you'd imagine, but not quite a 90% down day with 16% of volume and 14% of issues positive NYSE, 22 and 20% Naz.  Not sure if that's quite enough to signal capitulation but it's in the right neighborhood.

Commodities/Currencies/Bonds

Bonds - Noted this morning that yields had broken over that trendline posted yesterday on the back of the inflation and they just kept going from there with the biggest move up since March with 10-yr yield pushing up by nearly 8 basis points.

Traders now pricing in 100% chance of rate rise by Dec 2022.

Also did have a 10yr auction today that went well, but which didn't really give much support to bonds (maybe kept the selloff in check though?).  Peter Bookvar gives the details - "The 10 year note auction was pretty good. The yield of 1.684% was about 1 bp below the when issued price. The bid to cover of 2.45 was a touch above the one year average of 2.42. Also, direct and indirect bidders took 80% of the auction, above the 12 month average of 76%." 

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

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. 

Crude - As mentioned this morning got some life from the bullish statements in the EIA monthly report and held on to some of those gains.

Wrote on the EIA weekly report separately.

EIA - Summary of Weekly Petroleum Data for the week ending May 7, 2021 - Big drops in propane and "other" oils lead to big demand drop but crude inventories remain below 5-yr avg - details

https://sethiassociates.blogspot.com/2021/05/eia-summary-of-weekly-petroleum-data.html

As a side note, mobility in Europe looks like it's improving.

Nat Gas -  Continues to hover just under the $3 mark with a red day.  That $3 resistance is something.

Gold - An interesting day.  It popped just after the inflation report, testing that 1850 (actually 1845) level and downtrend line once again, but immediately sold off falling throughout the day.  Isn't it supposed to be an inflation hedge?

 And I guess neither is Bitcoin.

Copper - Pulled back today.

Lumber - I asked yesterday whether the limit down in lumber futures yesterday was a sign of the parabolic move correcting, and at least one trader is asking the same question.

U.S. Data

Wrote on CPI in the morning missive, which came in 4x expectations.

Although should be noted that a third of that was in used vehicle prices.

Leading Neil Dutta to note that in his opinion much of it likely is transitory.

Also out today was the NY Fed quarterly Quarterly Report on Household Debt and Credit.

In short, overall debt was up driven by increases in mortgage, student, and auto debt while credit card balances declined significantly well below 2019 levels.  Credit quality increased while delinquencies decreased (from the report):

Total household debt rose by $85 billion (0.6 percent) to reach $14.64 trillion in the first quarter of 2021. Mortgage balances—the largest component of household debt—rose by $117 billion, while auto and student loan balances increased by $8 billion and $29 billion, respectively. Credit card balances declined by $49 billion—the second largest quarterly decline in the history of the series (which dates back to 1999). Credit card balances are $157 billion lower than they had been at the end of 2019, consistent with both paydowns among borrowers and constrained consumption opportunities.

New extensions of credit were strong in 2021Q1 in both mortgages and auto loans. Mortgage originations, measured as appearances of new mortgage balances on consumer credit reports and which include refinances, were at $1.1 trillion, only slightly below the record high seen in 2020Q4. Auto loan originations, which includes both loans and leases, edged down slightly but remain at $153 billion. Aggregate limits on credit card accounts were flat in the 1st quarter, while limits on home equity lines of credit (HELOC) shrunk by $15 billion, continuing the declining trend. Median mortgage origination credit scores edged up, with the median credit score of newly originated mortgages at 788, reflecting both a high share of refinances and tightening of underwriting standards. The median credit score on newly originated auto loans also rose, up to 720, reflecting declining subprime shares of overall originations. Only 15% of the $153 billion of newly originated auto loans were originated to borrowers with credit scores below 620, the lowest share seen in the history of our data

Aggregate delinquency rates have continued to decline since the beginning of the pandemic recession, reflecting an uptake in forbearances (provided by both the CARES Act and voluntarily offered by lenders), which protect borrowers’ credit records from the reporting of skipped or deferred payments. As of late March, 3.1% of outstanding debt was in some stage of delinquency, a 0.1 percentage point decrease from the fourth quarter, and 1.5 percentage points lower than the rate observed in the first quarter of 2020, just as the Covid pandemic hit the United States. Of the $448 billion of debt that is delinquent, $343 billion is seriously delinquent (at least 90 days late or “severely derogatory”, which includes some debts that have been removed from lenders’ books but upon which they continue to attempt collection). 50% of loans in early delinquency transitioned to current, a higher rate than before the pandemic

Next 24

Pretty light overnight followed by jobless claims and April producer prices in the US.  I remember when I didn't even mention PPI, now it will be bigger than jobless claims.  Also get a 30-yr bond auction.

In earnings get a couple "big dogs" in BABA and DIS (BABA is before the open).  Also get ABNB after the close with DIS which will get some attention I'm sure.

Overall

Now that we've hit my downside targets, question is if we go further or bottom here.  I'm on the fence.  With us closing on the lows, it definitely sets up a likely down open, but those can be nice capitulation points, especially if we open sharply down.  Technicals have gotten much more favorable with RSI's pushing into oversold areas, and sentiment has definitely turned (and we got volatility "jumpy").  So maybe a break of those support levels I noted to induce a little panic, and we rally from there?  

.

Last earnings

SPX

Misc

Some other random stuff from today. 

I mentioned this morning that Chinese loan growth came in below expectations but didn't realize this puts 2021 on track to be a 15-year low as the government follows through on its promise to reign in debt.

As gas prices hit $3.

While some hope surfaces on the Israeli-Hamas violence.

As wallstreetbets founder says bubbles are for Boomers and hints at a movie (that I can guarantee I will never see).

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