Daily Summary – May 14, 2021 - Markets Exceed My Expectations

Daily Summary – May 14, 2021 - Markets Exceed My Expectations

I used the header "We Bounced, Now What?" yesterday which I answered by saying "I am not at all liking the breadth, particularly on the Naz today, and we've got very solid resistance above.  Also while the VIX pulled back, it generally has more than a two-day "spikey" period.  Finally, the technicals all are much more consistent with more weakness than with gains.  So if I had to bet I would say we'll take a crack at that overhead resistance but we'll end up failing and ending mildly red probably right on support."

Well I was right about testing support, but I was very wrong about ending flat to red.  Instead, indexes tested the support levels and just pushed right through, in most cases all the way to the next support level.  I am not sold on it being enough to prevent a down Monday, but there's a lot to like about today as we'll detail below. 

Today's action was led by the small caps and growth stocks with RUT leading all indices up 2.5%, Naz just behind at 2.3%, NDX just behind that at 2.2% and SPX "lagging" today up 1.5%.  All did finish down for the week.  

Style box consistent with that with growth finally outperforming this week.

While we're on stocks, BoA update on flows through Wednesday released today showed that despite the recent inflation worries and pullback of late, it didn't seem to dissuade investors with another $26B flowing into global equities ($9.1B into US shares).  

But as might be expected, the flows were out of growth (tech had first weekly outflow in 5 weeks (albeit by only $17M)) and into more inflation protected areas.  TIPS saw saw the largest inflow in 23 weeks, taking in $1.9 billion.

BoA's Michael Hartnett also made a trio of "summer calls" (from Heisenberg Report):

First, he sees tech continuing to struggle pending a Fed pivot or easing from China. Second, he cautioned that a secular inflation view doesn’t preclude a pullback in cyclicals. Finally, Hartnett said the transition from “goldilocks” to “stagflation” entails outperformance from defensive growth names, like staples, big pharma and “monopolistic telcos.”

Not sure I agree, but do think we could be in for some rough sledding sometime later this summer.

And despite today's outperformance, the recent trend of value over growth this month is clear with ratio of growth to value now back down to near 2019 levels.

 

Major Market Technicals

As noted above, strong performances today pushed indexes above the resistance levels identified yesterday.  Also we're starting to see some bottoming type formations occurring in MACD's and RSI's.  But that will take some more time to develop.  

In terms of specifics on moving averages, SPX just barely eked over its 20-DMA but remains beneath 4200 which has been a minor resistance in the past.  After that just has old highs as resistance.  NDX pushed over 100-DMA to just under uptrending 50-DMA (and 13400 level) which will be minor resistance before what is likely to be stiffer resistance in the downtrending 20-DMA.  Similarly RUT pushed over 100-DMA to just under 20 and 50 DMA's that basically sit on top of each other.  They are downtrending so that could be tough to get over.  Finally, Naz in least good shape as wasn't able to clear 100-DMA so has that to get over that before even worrying about those other levels.

SPX Sector Flag

Fantastic looking SPX sector flag with everybody getting a medal (all green) with eight up at least 1% and two over 2% (led by energy which had a big bounce back day).   

SPX Sector Technicals

Decent amount of moving above and below moving averages, and it's getting a bit much to go through it all every day, but suffice to say that the sectors that are above all resistance other than old highs are materials, comm's, financials, industrials, staples, and health care.  All the others have some resistance level in the not too distant future.  Of those above, financials and materials have the best underlying technicals (MACDs, RSI, etc.) along with energy.

Subsectors

Every subsector I track was green, even bios who were the holdout yesterday.  Biggest gains were in retail, bios, and semi's up 4, 3 and 3% respectively.  XBI led IBB today.  Transp and homebuilders were up around 1.5%.  Semi's about to run into a ton of chart resistance though (think Naz).

Breadth

Breadth turned around in a hurry with a great day, particularly on volume.  89 and 88% of volume positive on NYSE and Naz and 78 and 79% on issues.  Those volume numbers tell you that buyers dominated today.  Very positive, but would like to see more on Monday to confirm it is "real" buying and not a bunch of short covering ahead of a weekend.

Commodities/Currencies/Bonds

Bonds - 10yr yield pulled back a bit more today, down another three basis points right to the 50-DMA.

Dollar - Gave up most of Wednesday's big gain but did finish above the week's lows.

VIX - Did end up falling below 20 all the way to 18.81.  A bullish sign.

Crude - Recovered most of yesterday's loss to finish firmly in its trading range of the past couple of weeks.

Rig count edged back up this week.  

As traders pulled back on WTI positioning through May 11, explaining some of the weakness end of last week.

Nat Gas -  Continues to hover just under the $3 mark up a bit on the day.

Gold - Finished green as it continues to bounce back and forth between the 1850 level and the 100-DMA.  Finished just under the top (1850) of the range today.  

Copper - Pulled back again today setting up three days now of lower highs and lows.

Lumber - Continued it's correction (fell limit down again today).  @lumbertrading (an insider who has commented extensively on the subject) calls the short squeeze over.

U.S. Data

Did breakdowns of retail sales and industrial production/capacity utilization which both missed expectations:

April Industrial Production: +0.7% M/M vs. +1.2% consensus and +1.4% prior (revised) - IP comes in light, supply chains to blame? - details https://sethiassociates.blogspot.com/2021/05/april-industrial-production-07-mm-vs-12.html

US Retail Sales Advance (M/M) Apr: 0.0% (est 1.0%; prevR 10.7%; prev 9.8%) - Retail sales come in light - details https://sethiassociates.blogspot.com/2021/05/us-retail-sales-advance-mm-apr-00-est.html

Also today was UofM preliminary May reading which came in well below expectations with big decreases in buying intentions (seeing a pattern here on reports of late? - I would imagine that the Citi Surprise Index will look a lot softer after this month).

US Univ. Of Michigan Sentiment Mar P: 82.8 (est 90.0; prev 88.3) - Current Conditions: 90.8 (est 99.8; prev 97.2) - Expectations: 77.6 (est 84.5; prev 82.7) - 1-Year Inflation: 4.6% (prev 3.4%) - 5-10 Year Inflation: 3.1% (prev 2.7%)

Here was a nice breakdown from Peter Bookvar:

One year inflation expectations jumped to +4.6% from +3.4% in April, matching the highest since 2008.

I don't want to be premature here with the 'stagflation' word but it is the higher inflation expectations that we can cite as a reason for the drop in consumer confidence to 82.8 from 88.3 and below the estimate of 90. Last February the index stood at 100 right before everything hit. Both Current Conditions and Expectation components were lower. The UoM specifically said, "Consumer confidence in early May tumbled due to higher inflation...Rising inflation also meant that real income expectations were the weakest in five years. The average of net price mentions for buying conditions for homes, vehicles, and household durables were more negative than any time since the end of the last inflationary era in 1980." Also, expectations for higher gasoline prices rose to match the highest since 2011.

UoM did express confidence that consumer spending could overcome this but also said, "This combination of persistent demand in the face of rising prices creates the potential for an inflationary psychology, fostering buy in advance rationales and cost of living increases in wages." 

They went on to say, "Policy commitments to establish full employment while allowing inflation to meaningfully rise have never been attempted with the additional micro goals of equity and fairness across of population subgroups."

Employment and income expectations were little changed, the latter in nominal terms as household finance expectations, as quoted above, fell. 

On the inflation worries, expectations for rising 'interest rates over the next 12 months' jumped six points month over month to the highest since January 2019. 

Those that said it's a good time to buy a car fell -16 pts month over month to the lowest since the recession in October 2008. Go back to 1983 for the last time this small amount of people that thought it was a good time to buy a home. Those that said it's a good time to sell jumped +9 points and by 26 over the past three months to the most on record since this question was first asked in 1992. Finally, those that said it's a good time to buy a major appliance fell -12 pts month over month. 

Finally, we got import/export prices which came in around expectations.

US Import Price Index (M/M) Apr: 0.7% (est 0.6%; prevR 1.4%; prev 1.2%) US Import Price Index Ex-Petroleum (M/M) Apr: 0.7% (est 0.5%; prev 0.9%) US Import Price Index (Y/Y) Apr: 10.6% (est 10.2%; prev 6.9%)

US Export Price Index (M/M) Apr: 0.8% (est 0.8%; prevR 2.4%; prev 2.1%) US Export Price Index (Y/Y) Apr: 14.4% (est 14.0%; prev 9.1%)

Here's some more detail:

The April increase followed advances of 1.4 percent in March, 1.2 percent in February, and 1.5 percent in January. In April, a 0.7-percent rise in nonfuel import prices and a 0.5-percent increase in fuel prices both contributed to the overall advance. 

As to imports, in fuel, increasing petroleum prices more than offset decreasing natural gas prices.  In non-fuel, foods, feeds, and beverages; capital goods; and automotive vehicles all contributed to the April rise.

As to exports, a 0.9-percent advance in nonagricultural prices (higher prices for nonagricultural industrial supplies and materials, capital goods, and automotive vehicles which more than offset lower prices for consumer goods) and a 0.6-percent rise in agricultural prices (higher prices for other animal feeds, meat, dairy products, and vegetables more than offset lower prices for wheat, nuts, fruit, and cotton) both contributed to the April increase in U.S. export prices.

Next Week

An even lighter week for data next week highlighted by housing reports and May flash PMI's.

Also, earnings continue to tail off with only few hundred companies reporting and almost all of them either ADR's or smaller companies. There are some big ones left though such as Walmart, Home Depot, and Lowe’s who report next week. 

Overall

As noted at the top, we did much better today than I thought we would, although we've seen this before on a Friday with what looked like lots of buyers that turned out to be lots of people covering shorts.  The last time we had breadth that looked like this was 4/21, which was followed by a red day, but from there we moved to set the most recent ATH.  I'm sort of thinking we might get something similar (down Monday that we rally from).  But I am very uncertain at this point about the future path.  I do though think that we'll be testing the lows of this week sometime in the not too distant future.  Overall, I remain long term bullish.

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Last earnings

SPX

Misc

Some other random stuff from today. 

Earnings beats tailed off significantly this week (although 24% did raise guidance).

And if you want to understand where Pres Biden's head is at with respect to economic thinking, you should listen to the latest Odd Lots podcast from Bloomberg with his top economist, Jarod Bernstein.  Here's a great excerpt.

As reports indicate perhaps a mini-deal on infrastructure is in the works.

And StatsCan tweeted out this chart of Canadian manufacturing sales today (which beat estimates with a strong reading).  But my reason for posting is to show that if you adjust for price changes, the impact is much more muted.  I just wanted to show the huge impact that price changes can have when you're looking at charts, etc.  As I noted in my summary, retail sales are not inflation adjusted (i.e., real) so always keep that in mind.

And an Argus model (which I like better than a lot of others because it inputs things like interest rates, past and forward earnings, etc.) still sees market as overvalued but some (if not a lot) of that is due to the huge decline in past year's earnings.

As it looks like hopefully the gas hoarding of 2021 is over.

And an interesting turn of events in the pipeline hack story.

And moving along, consistent with the Fed credit survey this week, seems that mortgage lending standards have eased of late.

As Dept of Homeland Security issues a terror advisory.

And studies continue to support the efficacy of the mRNA vaccines.

Although interestingly the vaccinated feel less comfort than unvaccinated in being more exposed (or maybe not surprisingly as those who fear Covid the most are probably those most likely to be vaccinated).

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