Daily Summary – July 28, 2021 - No Fed Surprises
Daily Summary – July 28, 2021 - No Fed Surprises
Please excuse any typos.
While the post-pandemic pattern noted in the tweet above is a sell-off into the close on Fed days, the SPX actually staged a more pre-pandemic pattern of bottoming around the meeting (today it was right at 2 when the statement was released), recovering from modest losses to end flat. The Naz and NDX looked more like the blue line, finishing up seven and four tenths, respectively, while the RUT didn't even dip, just sort of flatlined for a couple of hours as it moved up throughout the day to finish up 1.5%.
Style box a mirror image of yesterday with small over large and growth over value today, with most of the box finishing at least mildly green. Large core was brought down by Apple which also weighed on the tech sector.
And if it's felt like small cap growth hasn't done as well as large cap growth over the past month, that's because it hasn't. In fact, the divergence is near record highs. Sort of thing that screams for a reversion to the mean to me at some point. We saw some today, in fact.
Major Market Technicals
Nothing really new to note here other than RUT technicals are firming up with a cover shorts MACD crossover and RSI breakout. It faces stiff resistance though.
SPX Sector Flag
SPX sector flag not great again today, with four green sectors dominated by defensives. We had five yesterday, six day before, ten Friday. Green sectors were an interesting mix of energy, comm's, health care, and materials. But while yesterday we had three sectors down more than 1%, none today.
SPX Sector Technicals Rankings
These are NOT necessarily in the order that I like them for investment but how their underlying technical fundamentals stack up. Going to keep playing with the groupings so bear with me. Started to bold changes.
XLV - Health care - MACD go long, RSI negative divergence, no overhead resistance. ATH today.
XLC - Communications - MACD go long, RSI negative (barely), no overhead resistance. ATH today.
XLK - Tech - MACD go short, RSI negative, no overhead resistance. Upgraded but not sure how long it'll stay in the top area. Needs to hold 20-DMA.
XLY - Discretionary - MACD go long, RSI negative, no overhead resistance. Upgraded but not sure how long it'll stay in the top area.
XLI - Industrials - MACD go long, RSI positive divergence. Over all resistance.
XLP - Staples - MACD go long, RSI neutral. ATH today.
XLU - Utes - MACD go long, RSI neutral, above all resistance.
- Sectors with mixed technicals but above all resistance.
XLRE - Real Estate - MACD sell longs, RSI negative, no overhead resistance. ATH today.
- Sectors with good technicals but extended (significantly overbought).
None
- Sectors that look to have bottomed with positive technicals but below significant resistance.
XLB - Materials - MACD go long, RSI positive. Needs to clear 100 and 50-DMAs.
XLF - Financials - MACD go long, RSI negative. Under 50-DMA. Upgraded.
- Sectors regrouping (negative technicals, short-term downtrend, long-term still positive/uptrend).
XLE - Energy - MACD go short, RSI positive, under multiple MA's. Starting to firm up. Might upgrade tomorrow.
- Sectors in poor shape (and in intermediate or long term downtrends (so expect further weakness for a while)).
None
Key Subsectors - SOX (semis), IYT (transp), XBI/IBB (bios), XHB (homebuilders), XRT (retail)
After three days of solid losses, bios came back hard today with XBI up 3.5% and IBB 2.8%. IBB remains in much better technical shape than XBI which is under a ton of resistance. Semi's also strong up 1.8%, retail was flat while homebuilders were mildly red.
Breadth
Huge improvement in breadth today with 76% of volume positive NYSE and 59% of issues. Naz even better at 79 and 69% Naz. Those positive volume numbers are really good. Compare to Thursday when we had much better point gains but 35 and 50% positive volume respectively.
Commodities/Currencies/Bonds
Bonds - For a Fed day, bonds were really subdued with the 10-year yield drifting up three basis points to 1.261%, and 2-year yield up one basis point to 0.21% so some mild curve steepening today.
Dollar (DXY) - Finished down again for a third day as we thought was likely, falling firmly under both its recent channel as well as 20-DMA. Technicals remain bearish, so I'd think we'll see further weakness.
VIX - Finished down at 18.31.
Crude (/CL) - Up 1% to $72.37, edging just a bit over the 20-DMA. Technicals continue to firm up. We'll see if it can hold over that resistance. If it does, think we'll challenge $75.
Nat Gas (/NG) - Recovered from early losses to finish around flat levels at $3.939/BTU. Technicals are mixed, so not sure where it goes from here. My guess would be it consolidates around the $4 level.
Gold (/GC) - Better day with highest close this week, breaking recent downtrend but remaining under the 200-DMA. Hasn't actually tested that (200-DMA in over a week). Technicals are mixed but window is still open to rally.
Copper (/HG) - Continues to consolidate recent move pulling back to 50-DMA which held. Technicals remain favorable. I think it moves up from here.
U.S. Data
Did reports on Advanced Indicators and EIA weekly today. Links below.
June Advanced Indicators - Trade and inventories - details
https://sethiassociates.blogspot.com/2021/07/june-advanced-indicators-trade-and.html
US DoE Crude Oil Inventories (W/W) 23-Jul: -4089K (est -2500K; prev 2107K) - Crude, gasoline, distillates all draw - details
https://sethiassociates.blogspot.com/2021/07/us-doe-crude-oil-inventories-ww-23-jul.html
In terms of the Fed meeting, the statement was basically what we (and most people) that it would be with just a couple of tweaks (HR)
The opening line (well, the line after the perfunctory “commitment” opener) thanks “progress on vaccinations and strong policy support” for a “continued” strengthening of economic activity. The assessment of the hardest-hit sectors was revised from “remain weak but have shown improvement” in June to “have shown improvement but have not fully recovered.” That might sound trivial (and it is, from a layperson’s perspective) but it’s marginally hawkish, as ridiculous as that sounds.The statement on inflation was unchanged. It’s risen, “largely reflecting transitory factors.”
As for asset purchases, there was a slight change to reflect the onset of the taper debate. In June, the statement said merely that purchases would continue at the current pace “until substantial further progress has been made” toward the Committee’s goals. The July statement, by contrast, said that since December, “the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.” So, progress. But not “substantial further,” apparently. Believe it or not, that tweak to the QE language will invariably be construed as hawkish at the margins.
In terms of the press conference, here are some quotes I noted on topics of interest.
Tapering - The committee discussed how they might change asset purchases, both in terms of pace and composition once "economic conditions warrant a change," he said. Powell said he's "not suggesting anything about a particular time on taper." No decisions have been made and he's not in the position to give any guidance on timing. "We will taper when we reach that goal, and we'll provide more clarity on it as we go, when appropriate." "There's little support" for tapering MBS earlier than Treasurys, Powell said. But that's something the committee will discuss. "I think we will taper both at the same time."
Substantial further progress - "I would say we have some ground to cover" before making "substantial further progress," he said.
Inflation - "In the near term, the risks to inflation is probably to the upside." Still Powell said he's confident that inflation will move back down. If inflation moves up, we'll "use our tools to guide inflation back down." "Nonetheless, we have to watch this very carefully." "Wages have moved up," Powell responds to a question about whether the higher wages will bolster inflation. A lot of that has been driven by new hires, he added. "There is a form of wage inflation that can lead to price inflation — we're not seeing that." Specifically, he said he's not seeing a wage-price spiral.
Falling bond yields - "I don't see anything (in the bond market) that challenges our framework," he said in talking about the relationship between bond yields falling and the Fed's inflation-averaging framework that it adopted last summer.
Timing of tapering and rate rises - When asked if, in response to inflation, the Fed would raise rates before ending asset purchases, he said: "Ideally you wouldn't be buying assets and raising rates" at the same time. That would mean you're loosening and tightening policy at the same time. On rate rises, he was pretty clear - “We’re clearly a ways away from raising interest rates. It’s not something that’s on our radar screen. We’re not at all near that point or anywhere near that point now.”
Covid - Powell said the Fed has observed that there's been less of an economic impact with each wave of virus over the course of the past year. "It seems that we've learned to handle this," Powell said.
Next 24
Overnight int'l data picks up a bit (highlights are German July CPI and employment and EU business and consumer sentiment as well as minutes from last ECB meeting which could be interesting) followed by weekly jobless claims, first estimate of 2Q GDP (and PCE), and June pending home sales in the U.S.
And earnings season continues. As noted on Friday, it's the biggest week of the season by market cap (next week is biggest by number of companies), and while tomorrow is not quite what we saw yesterday or today, it's still a big one (29th):
Monday, July 26:
- Checkpoint software
- Tesla
Tuesday, July 27
- 3M
- Alphabet
- Apple
- AMD
- GE
- Stryker
- Raytheon technologies
- Starbucks
- Microsoft
- Corning
- Xerox
Wednesday, July 28
- O'Reilly automotive
- Bristol-Myers Squibb
- Boeing
- Ford motor
- McDonald's
- Lam research
- General Dynamics
- Hess corporation
- Facebook
- PayPal
- Qualcomm
- Shake shack
- Pfizer
- ServiceNow
- Xilinx
- Shopify
- Spotify
Thursday, July 29
- Amazon
- Altria
- Merck
- US Steel
- First Solar
- Gilead Sciences
- MasterCard
- Hilton
- Martin Marietta
- T-Mobile
- Twillio
Friday, July 30
- Procter & Gamble
- Exxon Mobil
- Caterpillar
- Colgate-Palmolive
- Weyerhaeuser
- Chevron
Overall
Hard not to like the buying volume today, but think the headline indices could struggle tomorrow with FB down big and negative action so far from the other heavyweights following earnings. So we'll just continue following our roadmap from 3Q20 earnings season, which has been pretty accurate thus far, which says we'll have some ups and downs, but drifting a little higher before coming back down, although we could be getting near that a peak here in the middle of the chart. If so, I think we retest the 50-DMA (and probably break it as we did 3Q20) but it's too early to call for that quite yet.
3Q20 Earnings Season
This Earnings Season
And you know the "late summer playbook" by now - Expect choppiness with lots of ups and downs and likely a 4-5% pullback (which we have probably already seen), but basically ending up around where we started earnings season. I continue to expect a big drawdown (10-15%) in the next several months. Our "3Q20 earnings playbook" says to watch for the middle of August for that, but the peak could be as early as next week.
Misc.
Some other random stuff.
Repos continue to drift up toward $1T.
As it appears bipartisan group reached a deal on a roughly $1T infrastructure package (with about half "reused" spending and $550B "new" spending). WSJ.
To see more content, including summaries of major economic reports and my morning and nightly updates go to https://sethiassociates.blogspot.com
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