Daily Summary – May 27, 2021 - Small Caps Outperform Again

Daily Summary – May 27, 2021 - Small Caps Outperform Again

If you've been reading the technical portion of this summary, you would know that I first asked RUT to get over its 50-DMA, which it did yesterday, then I asked if it could follow with a strong day or two, and it did that today with a solid 1% gain.  You'll have to read that section to find out what it needs to do next.

But for a second day small caps (and, again, the smaller the better as the microcaps were up 1.78% today) easily outpaced the larger indices, but in a change growth conspicuously lagged (yesterday it was not so clear).  In addition to the RUT up 1% as noted, scoreboard had SPX up a tenth, Naz flat, and NDX down a third of a percent.

But as you can see from the style box, most of the growth weakness was in the big caps.  And the more speculative stocks continued to have good action with AMC shooting higher (up over 30%) and ARKK  continuing to do well (ARKK up for 4th day in a row (although coming in to some important resistance)).  (As a side note not comparing ARKK to AMC other than they are both favored by more speculative investors)

As a side note, some of today's action might be due to that rebalance we discussed earlier of MTUM, which has $16B flowing basically from growth to value shares.  I believe that's going on today and/or tomorrow.

Major Market Technicals

If you want to see what rangebound trading looks like check out the SPX this week.  I would think it was an options expiration week with a 4200 pin.  We've closed within 12 points of that level every day this week (always below) and right on it today 4200.88).  I guess that qualifies as pushing over that key level? 

Turning to the RUT as noted above, RUT did have that strong day I was looking for that gives it an RSI breakout to go along with its MACD crossover.  Now it has two more levels to breach before it can shoot for its ATH.  Next up is the 2285 level which you can see has been some resistance in the past.  After that will be the April highs.

SPX Sector Flag

Fewer green sectors in the SPX sector flag today with six green (seven yesterday), but two were up over 1% (none yesterday).  Cyclicals took the top three spots today.  But three sectors were down more than the worst sector yesterday although none down more than two thirds of a percent.  

SPX Sector Technicals

Health care edged over its 20-DMA so has pathway to ATH.  Also got a cover shorts MACD signal and RSI breakout.  Comms hit ATH.

On the other side utes fell below 50-DMA; no signs of a bottom in the technicals. 

Subsectors

All the key subsectors were up today, all between 0.6% (semi's) and 1.3% (bios - XBI; IBB lagged again today up only a tenth).

Breadth

Breadth solid again today with 72% of volume positive NYSE, 68% Naz.  Issues kept up a little better at 60 and 63%.  So that continues to look good.  That said, someone brought something to my attention which is that the meme stocks are sucking up a huge amount of volume.  AMC for example had something like 12% of the total volume today (and was up huge) so that is likely skewing these stats.  Probably why following the breadth indicators haven't worked as well as they have in the past.  I'll keep reporting them though as it gives some indication as to the strength of the buying action.

Commodities/Currencies/Bonds

Bonds - After pushing towards the bottom of our recent range early in the week, 10-yr yield moved up for a second day, more strongly today up by four basis points today to 1.61% just under the 50-DMA.  

After the strong 2-year auction Tuesday and 5-year yesterday, had a pretty good 7-year today (as a reminder a weak 7-year auction was the spark that light the huge 6-week selloff in bonds a few months ago).  Like the 5-year yesterday, rate came in little more than half point below the when issued, saw increased bid-cover, and also saw increased foreign take-up with bidders taking over 80% of the auction which is solid.

Dollar - Despite yields moving up traded at flat levels right at 90 held back by that downtrend line we drew in yesterday.

VIX - Continued to trade down to 16.74.

Crude - Despite all the cross currents seems to be taking a cue from the physical market positives we noted a few days ago pushing solidly higher to the very top of its range this month.  If it can run a few more percent, it will be looking like a breakout.  In that regard, it got a go long MACD signal and its RSI is very close to breaking out.

Mentioned OPEC+ meeting next few days.  From early indications it appears that there will be no changes to the scheduled 840kbd increase for July, the last month of the deal struck back in March.  From Bloomberg - "Once the current output revival is completed, the 23-nation network will still be keeping about 5.8 million barrels of daily crude output off-line. That's roughly 6% of global supplies.  While OPEC+ has formally committed to idling those barrels until next April, analysts expect the producers will tap their spare reserves as demand continues to recover in the second half of this year. The discussion over returning the remainder is likely to gather pace at the group’s next gathering."

LONDON (Reuters) - OPEC+ is likely to stick to the existing pace of gradually easing oil supply curbs at a meeting on Tuesday, OPEC sources said, as producers balance expectations of a recovery in demand against a possible increase in Iranian supply.

Two OPEC+ sources, speaking on condition of anonymity, said there were no talks on amending the oil output-cut levels for July, while two more said the producers should stick to their existing series of gradual output increases.

“Not to relax more on production cuts is a wise decision to be taken, in my opinion,” one of the OPEC+ sources said.

And as we approach the holiday weekend, gas prices remain high.

With some warning of a "hurricane-like" shortage possible.

Nat Gas -  Just when I thought it was going to test that downtrend line, it got hit by a bearish storage number and turned around and fell to its 20-DMA.  We'll just have to see where it goes from here.

Gold - Finished red again today right at the 1900 level (GC).  Technicals still remain favorable but it is still very overbought.

Copper - Broke out of recent trading range with a strong day pushing over its 20-DMA.  

U.S. Data

Did reports on jobless claims, durable goods, and pending home sales today.

Initial Jobless Claims for week ending May 22nd: -38K to 406K vs. 450K consensus, 444K prior (unrevised) - claims at new pandemic low and progress on most other fronts - details

https://sethiassociates.blogspot.com/2021/05/initial-jobless-claims-for-week-ending.html

US Durable Goods Orders Apr P: -1.3% (est 0.8%; prevR 1.3%; prev 0.8%) - Headline durable goods weak but ex-transp beats and business spending remains solid - details https://sethiassociates.blogspot.com/2021/05/us-durable-goods-orders-apr-p-13-est-08.html

US Pending Home Sales (M/M) Apr: -4.4% (est 0.4%; prev R 1.7%) - Pending home sales contract in April - details https://sethiassociates.blogspot.com/2021/05/us-pending-home-sales-mm-apr-44-est-04.html

Couple other reports that came out today.

Revised estimate of 1Q GDP was moved down a touch with prices revised up.

Q1 GDP estimate stays stable with initial print, PCE price index adjusted up

Q1 GDP (second estimate): +6.4% annualized vs. +6.5% consensus and initial estimate of +6.4%

PCE price index: +3.7% vs. +3.5% previous estimate; +1.5% in previous quarter.

Core PCE prices: +2.5% vs. +2.3% consensus and +2.3% previous estimate; +1.3% in previous quarter.

Boosts estimate for Q4 2020 real gross domestic income to 19.4% increase, up 3.7 percentage points from its previous estimate.

That increase resulted from a $157.8B upward revision to Q4 2020 wages and salaries growth, now estimated to be $360.5B.

And May KC Fed Mfg Survey released, and as we've seen with other May PMI's, headline weaker than exp's but remaining solidly in expansionary territory with strong outlook.  New orders expanding, prices in record territory. 

Kansas City Fed Mfg Activity: 26 (est. 30; prev. 31)

From the report:

Tenth District manufacturing activity continued to expand at a strong pace, and expectations for future activity remained solid. The index of prices paid for raw materials compared to a month ago posted a new survey record high for the second straight month, and prices received for finished goods also surpassed historical levels.  Moving forward, district firms expected materials prices and finished goods prices to continue to increase over the next six months. Factory Activity Continued to Expand at a strong pace.  

The growth in district manufacturing activity was driven higher by increased activity at durable goods plants, especially for primary and fabricated metals, machinery, furniture, and transportation equipment manufacturing. The month-over-month index for new orders expanded at a faster pace in May. Other month-over-month indexes remained highly positive, indicating expansion, but slowed slightly from record levels in April. Inventories for materials and finished goods also remained positive. Year-over-year factory indexes rose further in May, and the year-over-year composite index climbed from 35 to 43. The future composite index remained solid at 33, similar to previous months but with an increase in expectations for production, shipments, and new orders

“Regional factory activity increased again in May with strong expectations for future activity,” said Tenth District economist Chad Wilkerson. “Supply chain delays and rising materials prices have negatively impacted over 84% of firms. A majority of firms also reported plans to increase wages in 2021, partially in response to difficulties attracting qualified job applicants. ”

When asked how long firms expected rising materials prices and lack of availability/delivery time to persist, 27% reported 3-6 months, 52% reported 6-12 months, and 17% indicated more than a year. Less than 5% of firms anticipated these issues would be resolved within the next 3 months. Regarding wages for the remainder of 2021, 10% of firms indicated they expected to raise wages up to 2%, over a third of firms expected to raise wages 2-4%, and 20% of firms expected to raise wages 4-6%. Around 13% of firms expected wage increases of 6% or more, and 10% of firms planned to hold wages steady. Over 84% of firms indicated hiring plans have been restrained because they “cannot find workers with required skills.

Comments were all about price increases and supply chain issues (including labor).

“Pricing of raw materials is up more than 20% with no sign of slowing.” “Material and part supply shortages are our current impediment to increasing revenue. If materials and parts were available, we are still over 200 people short to fulfill our back orders. Workforce is and will be manufacturing's largest hurdle to growth in the U.S.” “We are feverishly working to pass on increased prices to reflect rising material prices. Inflation is going to be a big factor this year and beyond.” “We are having a really difficult time hiring and keeping quality staff at any wage rate. Everywhere you see help wanted signs, the jobs are going unfilled, exacerbating price increases and shortages.” “It is more difficult to find people, so we are having to hire at higher wages.” “We are having to raise starting wages to attract new workers, which causes us to raise the wages of our entire workforce.” “The number of applicants has deteriorated through conventional sourcing.” “We are getting daily price increases from vendors everywhere from 4% to 30%.” “We are turning away a large number of orders due to material availability.” “Significant cost increases in every commodity and service we utilize. Increased lead times and prices of electronic parts and circuit boards has crippled several of our product lines.” “The steel industry has suffered from 3x cost increase and lack of supply over the last 9 months. Our financial condition and strategic relationships have allowed us to be affected less than others in our industry.” “We do not believe the supply chain conditions are going away any time soon. Problems are going to persist into 2022."

Here's a nice chart from Advisor Perspectives that averages the five main Fed indexes.

Next 24

Overnight we'll get prices from Japan, Germany, and France along with some other random data as well as EU reports on consumer and business sentiment followed by April PCE prices, personal income and spending, and inventories, and May UofM final ready on consumer sentiment in the US. 

No earnings of note.

Overall

I've mentioned that we're starting to see some of the caution moderating, but it remains far from the bullishness of a couple of months ago.  We can see this in the put/call ratio coming down a bit (but still relatively high).  Here's the 10-DMA with SPX.  As you can see put/call falling is generally a bullish development.

And in the NAAIM which improved but still well below levels earlier this year.

And AAII which also remains much lower than earlier this year.

So with sentiment moderate but improving, technicals firming up, and breadth following, for now I continue to look for higher prices.

Last earnings

SPX

Misc

Some other random stuff.

Card spending remains strong.

As Republicans unveil their infrastructure proposal.

And Biden at least is saying he's serious about negotiating (I mean it is $900B, which would in any normal year be a massive infrastructure bill).

And an interesting nugget from the Biden budget proposal.

And hopefully we're moving past these chip shortages, and we can get auto production restarted.

And you'd think Yellen would have more sympathy for the position they're putting the Fed in.  Flood the economy with $$ but that whole inflation thing is the Fed's problem. ;-)

And reverse repos hitting new records as institutions don't have anywhere to park their funds for yield.

And yesterday was 125th birthday for the Dow.  Interestingly, it comes at a time that the Dow has diverged unusually from the S&P of late.

And I'm sure AMC execs are kicking themselves for not waiting to price their secondary.

And Canadian Business Barometer improves.

And I mentioned a month or so ago, Covid cases should be peaking in India a couple of weeks after the heavy restrictions were put on, etc., and appears to be the case.  Great to see.  Now, if we could just get those Brazil and Chile curves moving down (especially since they're going into winter, so could get ugly if they don't get levels down). 

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