Daily Summary – July 29, 2021 - The Rotation Continues

 Daily Summary – July 29, 2021 - The Rotation Continues

Please excuse any typos.

The back and forth between value and growth of late flipped back to value's favor, but most stocks pushed higher today, led again by small caps.  RUT was up seven tenths, SPX four, while Naz and NDX were up around a tenth.   

Style box tilted towards value but core actually outperformed.  Small and mid-caps over large.

And while value/growth was on a basically one-way trip to the downside from the start of June until last week, one of our favorites, Charlie McElligott was out today with a note saying that as we move past August and its low liquidity into September and October, value may retrace some of this slide. 

In “an environment where yields could again begin to [move] higher as supply picks back up and QE tapering is announced” over the next several months, traders may look to pivot back into growth he said.  He found support for his view in what he thought was a "hawkish" Fed yesterday - “Despite the standard ‘both sides of mouth’ from Jerome Powell in the press conference, the statement read very ‘hawkish’ to me,” he said, citing the upgraded economic assessment, no effort on the Committee’s part to make the Delta variant part of the forward guidance and the nod to “progress” (if not “substantial further”) vis-à-vis taper proximity. He also noted, citing a colleague, that in the past, the “coming meetings” language equated to two meetings.   “[T]he stone has been cast,” Charlie said, before quoting another colleague’s assessment of the rates outlook (truncated):

While the price discovery of how low yields can go has been anyone’s guess, the one thing that we remain more confident about is that 3-6 months from now we will look back and say that these were the “wrong” yields given the trajectory of the economy and the long-term fiscal outlook. Longer-term it does seem like the balance of risks is skewed in favor of higher yields if the Fed begins to taper asset purchases, and allows for real price discovery as private-side investors are forced to fill the demand gap. It seems perfectly reasonable that these investors will demand a higher yield concession to own USTs given the underlying strength of the economy, the long-term fiscal outlook and ongoing funding needs from the Treasury (i.e., UST issuance).

As HR summed it up -  "coming full circle, the overarching point from McElligott on Thursday was just that once August seasonality and attendant 'pitfalls' (read: lackluster liquidity) are out of the way, any return to the bear-steepener mentality in rates would make for 'a benevolent backdrop from a risk-on perspective [as] traders looking to get a bit more front-footed, emerge from their PnL / VaR bunkers, and begin to allocate back into playing some offense again,' whether in bearish rates expressions or another go at reflation trades in equities.''  

Putting on curve steepeners was a bit of a "widow maker" trade in June, so, as always it's the timing, which Charlie addressed: “it’s about that timing ‘turn’ into historical risk-on seasonality for returns as we transition from August, picking up into September, then really zooming positive in October/November.”

Capital Economics was out today with similar sentiments on yields.

Major Market Technicals

New ATH from SPX.  RUT did make it over 20-DMA but remains under the 50/100 DMA confluence.  Technicals continue to improve though.

SPX Sector Flag

Improved SPX sector flag today, with nine green sectors (four yesterday) with cyclicals taking the top five spots.  Only one sector down more than 1%, which was comm's, dragged down by a 4% fall in Facebook.  

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.  

- Sectors with good/ok technicals not stretched/overbought, above most resistance.  

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. ATH today.

XLI - Industrials - MACD go long, RSI positive divergence.  Over all resistance.

XLP - Staples - MACD go long, RSI neutral.  

XLU - Utes -  MACD go long, RSI neutral, above all resistance.  

- Sectors with poor technicals but above all resistance.

XLRE - Real Estate - MACD sell longs, RSI negative,  no overhead resistance.  

- 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 50-DMA.

XLF - Financials - MACD go long, RSI negative.  Under 50-DMA.  

- 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.  Watching to upgrade.

- 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 big up days yesterday, XBI and IBB sold again today XBI down -1.66% and IBB -0.61%.  IBB remains in much better technical shape than XBI.  Semi's up 1.8% again today pushing that to just under ATH's and improving its technicals to positive from mixed.  Homebuilders also have broken out with good technicals, up almost 3% today.  Transp up half percent but remains in a downtrend.  Technicals are firming up though.  Retail up eight tenths and remains in ok shape but has gone nowhere last couple of months.

Breadth

After huge improvement in breadth yesterday, took a step back with 65% of volume and 66% of issues positive NYSE (was 76% and 59% yesterday).  Naz was bigger deterioration at 56 and 52% versus 79 and 69% yesterday, but that makes some sense given the big differential in gains.  Given where we've been on average the last few weeks, I'll take it.

Commodities/Currencies/Bonds

Bonds - Bonds were little changed today with 10-year remaining right under the 200-DMA and top of its downtrending channel at 1.269%.  2-year yield down one basis point to 0.20%.  

And there was a 7-year auction today that was relatively weak with clearing price up by a basis point and bid/cover and amount accepted both coming in below the last auction. 

Dollar (DXY) - We called for weakness coming into the week, and it's been all down, as it closed red for a fourth straight day, breaking under $92.  Technicals remain bearish, so I'd think we'll see further weakness.

VIX -  Finished down at 17.70.

Crude (/CL) - Was able to edge over the 20-DMA and from there got moving settling at $73.41.  Technicals continue to firm up, so I think we'll challenge $75.

Nat Gas (/NG) -  Strong day after better than expected storage report pushing back over the $4 mark to $4.054/BTU.  I still, though, think it consolidates around the $4 level.

Gold (/GC) - Strong day out of nowhere, pushing through the downtrend, 200-DMA, and 50-DMA before pulling back to settle right on the latter.  This improved the technicals quite a bit, so could see more gains from here.  

Copper (/HG) - Bounced back today after couple of days of consolidation. I think it moves up from here.

U.S. Data

Did reports on jobless claims, pending home sales, and GDP today.  Links below.

Initial Jobless Claims week ending Jul 24: -24K to 400K vs. 390K consensus, 424K prior (revised from 416K) - Initial claims improve but benefits recipients increase - details

https://sethiassociates.blogspot.com/2021/07/initial-jobless-claims-week-ending-jul_29.html

US Pending Home Sales (M/M) Jun: -1.9% (est 0.3%; prev 8.0%) - Pending home sales come in weak but above pre-pandemic levels - detail

https://sethiassociates.blogspot.com/2021/07/us-pending-home-sales-mm-jun-19-est-03.html

Q2 GDP (initial estimate): +6.5% vs. +8.0% consensus and +6.4% in Q1 - GDP comes in light - a lot to go through - details

https://sethiassociates.blogspot.com/2021/07/q2-gdp-initial-estimate-65-vs-80.html

Next 24

Overnight another big int'l data night with a number of reports from S Korea, Japan, and Australia followed by GDP and price indexes in Europe and then we get the same (PCE) in the US for June along with June personal income and spending numbers and UofM July consumer sentiment.

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 earlier this week, it's still got a few big ones (30th):

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

And after the close tonight we got a few bigger ones led by Amazon whose sales came in light and Q3 sales expectations even lighter.  Shares were down over 4% last I checked.

Overall

Sentiment is starting to turn more bullish...

... which makes me more cautious, but buying volume stayed pretty good today (NYSE at least).  Amazon will definitely be a drag tomorrow, but market overcame FB today, so I'm guessing tomorrow won't be all that different than today.  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 Russia and China to conduct joint military exercises.

And US looks to impose more sanctions on Iran, this time for precision military.  WSJ.

And WH calls for $100 payments to encourage vaccinations.   WSJ.

To see more content, including summaries of major economic reports and my morning and nightly updates go to https://sethiassociates.blogspot.com