Daily Summary – June 7, 2021 - Small Caps Lead Again

Daily Summary – June 7, 2021 - Small Caps Lead Again

So, I was on conference calls almost the entire day, and as a result I am way behind, so this was a bit hurried.  Sorry for any typos or missed content.

The back and forth between large and small caps continued with small caps taking the lead, with the RUT up 1.4%, Naz half percent, NDX quarter percent, and SPX finishing just in the red. 

Style box reflects this as well as a bias to growth today again (was on Friday also). 

Which apparently we should expect as growth has done well after large outflows like we noted on Friday.

And JPM says "the next leg higher is likely upon us."

Major Market Technicals

Nothing really to note here other than RUT continues to look very good technically and with today's push moved over the April highs to the highest close since mid-March.

SPX Sector Flag

As would be expected, SPX sector flag much weaker today with four green (ten on Friday) and none up over 1% (RE was close though up nine tenths).  Only one down more than 1% though (materials) but clear profit taking on cyclicals which took the bottom four spots.

SPX Sector Technicals

Not much to note on the sector charts.  RE and comm's hit ATH's.  RE is looking exceedingly overbought.  Noted on Friday, but tech sector technicals (XLK) continue to look very good.  Materials on the other hand looking the other way.

Here were the Bespoke sector trends coming in to today.

Subsectors

Bios light up after Biogen approval (noted below) with XBI up 4.62% and IBB up 3.44%.  Retail also up over 1% while transp, semi's, and homebuilders all were red. 

Breadth

Breadth was a positive today with 58% of volume positive NYSE and 77% on Naz.  Those are very solid numbers given SPX was down and Naz was only up half percent.  Issues not bad either at 54 and 62% respectively. Good stuff.

Commodities/Currencies/Bonds

Bonds - 10-yr yield up a touch to 1.569%.

Dollar - Weak again today falling below the 20-DMA and the 90 level.  Starting to really rethink my prediction that we were headed for a test of the 91 level.

VIX - Closed unchanged 16.42.

Crude - Took a couple of shots at $70 today (WTI), actually touching it early on, but ended up falling back to close basically flat at 69.22.

Noted the lengthening in positioning in WTI on Friday, John Kemp gives a more granular look at that as well as the other petroleum products:

Hedge funds and other money managers purchased the equivalent of 40 million barrels in the six most important futures and options contracts in the week to June 1, after selling a total of 74 million over the previous three weeks.

 

Purchases were weighted towards crude oil, especially NYMEX and ICE WTI (+21 million barrels), with smaller buying in Brent (+9 million barrels), according to position records published by regulators and exchanges.

 

There was also significant buying in European gas oil (+13 million barrels) but only minor changes in U.S. gasoline (-1 million) and U.S. diesel (-2 million) (https://tmsnrt.rs/3ge36NV).

 

The fact position-building is being led by crude rather than refined products suggests production controls rather than the recovery in consumption is the primary driver of higher prices at present.

 

Fund managers are responding to signs of continued output restraint, especially from the U.S. shale sector, which is expected to lead to a further reduction in inventories over the second half of the year.

 

Since the start of last week, front-month crude futures prices have risen to multi-year highs, as the market signals the need for an increase in output.

 

The total position across all six contracts (867 million barrels) is high (78th percentile) but not exceptionally so indicating moderate confidence in further price rises as well as the potential for more position-building.

 

The position has moved from the lower-half to the upper-half of its range since the middle of March but has not broken out by reporting deadline at the close of business last Tuesday.

 

The spread between bullish long and bearish short positions (at a little over 5:1) is also only moderately stretched (68th percentile) confirming modest confidence in further price increases and scope for further accumulation.

As bets on $100 WTI have become the most popular out of any strike price (with the Dec 2022 $100 call option the most traded out of any option).  This is while the futures curve has $61 pegged for that time (Dec 2022).  

Nat Gas -  Just keeps vacillating between that trendline and the 20-DMA.  They are narrowing so one will have to give before too long.

 

Gold - Continued its recovery pushing back above 1900 but remains below last week's highs.

Copper - Finished mildly red remaining below 20-DMA.

U.S. Data

Said this morning (since corrected) that NFIB was today, but it's actually tomorrow.  We did get Conference Board's Employment Trends Index for May, which improved to 107.35 from April's 104.31.  It noted wide-spread labor shortages as well as the very strong wage increases the last two months.

From the report:

“In the past three months, the Employment Trends Index grew much faster than any other three-month period in the history of the index prior to the pandemic. This marked acceleration suggests historically strong job growth in the coming months,” said Gad Levanon, Head of The Conference Board Labor Markets Institute. “Past index data had signaled growing labor shortages, but the most recent data strongly reinforces this trend. Indeed, forty-eight percent of firms reported an inability to fill positions in May’s NFIB survey—an all-time record. Job shortages are likely to be more acute in those states that opened first, less in those that still have restrictions. The labor shortages are causing wage growth to surge. Average hourly earnings in the past two months rose by 7.4 percent (annual rate), which is two to three times the typical growth rate in recent decades. If the current rate of wage growth continues for several more months, it could significantly impact inflation and monetary policy. Toward the end of 2021, labor shortages are likely to ease as some of the labor supply constraints moderate.” 

May’s increase was driven by positive contributions from all eight components. From the largest positive contributor to the smallest, the components were: Initial Claims for Unemployment Insurance; Percentage of Respondents Who Say They Find “Jobs Hard to Get”; Industrial Production; Percentage of Firms With Positions Not Able to Fill Right Now; Job Openings; Real Manufacturing and Trade Sales; Number of Temporary Employees; and Ratio of Involuntarily Part-time to All Part-time Workers. 

The Employment Trends Index is a leading composite index for employment. Turning points in the index indicate that a turning point in the number of jobs is about to occur in the coming months. 

Also out today was April consumer credit.  I'll have a stand-alone update on that when I get a minute, but the cliff notes is it showed an $18.6bln increase after increasing a downwardly revised $18.6bln (from $25.8bln) in March.  The key takeaway for me was that revolving credit (mostly credit card balances) decreased by a sizeable $23.5bln after increasing a combined $53.5bln the prior two months.

Next 24

Overnight we'll get a bunch of Japanese data (although most of it pretty dated), German IP and sentiment, and EU employment and sentiment followed by the aforementioned NFIB, JOLTS, and trade data in the US.

Overall

Overall, just going to stick with my June script - "I would expect a lot of drifting around this month but I continue to have a bias for upside versus downside.  I'll keep posting the progress versus last earnings season until we get to the two month mark (where the "last earnings" chart stops)."  That "stops" date is June 14th FWIW.  

Last earnings

SPX

Misc

Some other random stuff.  

Know you're all fans now of Charlie McElligott, so thought I'd update on his latest via Heisenberg Report.  I know it's really technical.  Sorry.  

Charlie sees stocks "pinned" but with catalysts for movement coming along:

“US Equities index / ETF options positioning sees us currently in a substantial ‘Delta accumulation’ phase, as funds are using upside options as ‘cheap beta,’ with $Delta rank for SPX / SPY options now an ‘extreme’ 93%ile since 2014 and QQQ at a very solid 85%ile,” he said, noting that the prevailing “‘long Gamma / long Delta options market stabilizer is boosted by full-throttle corporate buyback[s] ahead of the upcoming earnings season blackout.”

In addition, he cited the “white-hot” inflows into equities and the ongoing “slow-bleed in VIX ETN Net Vega, as ‘long vol’ positions initially monetized after the CPI overheat ‘shocker’ have now been given up.”

He flagged the potential for “something pretty ‘real’ into the Friday of next week’s Op-Ex cycle turn,” when he sees a “potential window for a pivot [as] much of [the] $Gamma and $Delta is set to roll off and be de-risked.” Front-month accounts for more than 80% of the SPX/ SPY Delta and 90% of the QQQ Delta, Charlie noted.

That should open the door to a wider distribution of outcomes, just as the “background” vol control bid peaks. For now, vol control will likely keep adding exposure as the “insulated” environment keeps benchmarks well-behaved. But once Op-Ex provides the market with a “greater ability to move thanks to reduced Dealer hedging flows,” vol control re-leveraging could go into reverse “requiring a smaller incremental daily change as a catalyst,” McElligott wrote. If buybacks fade into corporate blackouts, that too would remove a vol-dampening catalyst. 

As a reminder on the above, next week is the options expiry for monthly and quarterly options so a lot of gamma gets "released" on a day like that as we've discussed which can lead to big movement in stocks and indices. 

Moving along, buy the close, sell the open continues to work.

Heavy truck sales near record high.

And in a big development in pharma land, FDA somewhat surprisingly approved Biogen's Alzheimer's treatment.

As US law enforcement recovers at least a portion of the Colonial ransom.

And EU patience is "wearing thin" in terms of reaching agreement on Northern Ireland.

And 6G?  I thought we were still rolling out 5G.

And a lot of unfortunate violence this weekend.

  

As Japanese become latest to talk about vaccine passports.  Unfortunately they only have like 8% of their population vaccinated.

And, just, ugh.

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