Daily Summary – July 30, 2021 - The Chop Continues

Please excuse any typos.

The choppy market action which we anticipated coming into earnings season resurfaced today with stocks pulling back on the last day of trading for the week (and month) as the CDC suggesting the delta variant spreads "like chickenpox" and the continued dramatic rise of cases put a damper on things. At least that was the news narrative (along with the continued issues in China, etc.). Or maybe it was just markets being markets given the fact that BofA's Michael Hartnett's latest edition of his popular weekly “Flow Show” series gave Covid a collective yawn as it came in below China, asset bubbles, taper tantrums, and inflation as a worry.

IMHO, more likely it was some of that "peak growth" worry (Amazon a catalyst today) paired with some profit taking after what was a pretty good month for the larger caps (and Naz did finish green also in July although RUT was firmly negative). Oh, and did I mention that we're in a seasonally weak period for stocks in general?

Anyway, whatever the reason, stocks ended July on a down note with SPX, NDX, Naz, and RUT all finishing down between 0.5 and 0.7%.

Style box a bit all of over the place today, but all were down other than large core.

And speaking of AMZN, EU decided to kick them while they were down.

And Charlie McElligott was out today giving his "five ingredients" for the rotation to value/higher rates we discussed yesterday:

The “‘bearish USTs / higher yields’ macro catalyst” needs to “fall into place,” he said. For that, we need “some mix” of a QE taper announcement, the resumption of heavy IG supply and the persistence of robust economic activity against a (hopefully) improved Delta variant trajectory, to “synchronize” with risk-on seasonality at the onset of Q4 (figure below, from Nomura).

As BofA noted that global equity fund inflows popped back to a 6-week high this week.

Major Market Technicals

NDX and Naz did pull back to their 20-DMAs which held (barely for Naz) but both flipped back to sell longs MACD this week and have negative RSI divergences so technicals not great for them. SPX actually getting close to that itself (already has the RSI divergence). RUT as we mentioned earlier this week, has the best technicals, but it has lots of resistance to work through.

SPX Sector Flag

SPX sector flag deteriorated today as would be expected, with only four green sectors (nine yesterday) with an interesting mix as materials on the back of a strong day from the chemicals subsector joined three bond proxies/defensives. Two sectors down more than 1% (one yesterday), with discretionary down over 2% pulled down by Amazon's terrible day.

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, above all moving averages. ATH today.

XLC - Communications - MACD go long, RSI negative, above all moving averages.

XLK - Tech - MACD go short, RSI negative, above all moving averages. Upgraded but not sure how long it'll stay in the top area. Needs to hold 20-DMA.

XLY - Discretionary - MACD sell longs, RSI negative, fell under 20-DMA. This is close to a downgrade.

XLI - Industrials - MACD go long, RSI positive divergence, above all moving averages.

XLP - Staples - MACD go long, RSI neutral, above all moving averages.

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

XLB - Materials - MACD go long, RSI positive, above all moving averages. Cleared 50-DMA. Upgraded today.

- 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.

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

As it's end of the month, quick check of monthly charts shows all have good technicals but all overbought other than utes, staples, financials, and energy. Comm's is really overbought.

Key Subsectors - SOX (semis), IYT (transp), XBI/IBB (bios), XHB (homebuilders), XRT (retail)

XBI sold again today down -1.4% but IBB managed a flat finish. IBB remains in much better technical shape than XBI. Semi's up again today 0.7% capping a big three-day run and pushing that to a new ATH. Homebuilders down two tenths and retail eight tenths.

Breadth

After great breadth on Wednesday, ok on Thursday, mixed today. Only 28% of volume but 41% of issues were positive NYSE. Naz was 51 and 37%. The positive volume on Naz is pretty good, and the 41% of issues on NYSE is not terrible but the others pretty weak.

Commodities/Currencies/Bonds

Bonds - Bond yields fell today with 10-year finishing around lowest levels of the week, down three basis points at 1.239%, remaining in that downtrending channel. 2-year yield down two basis point to 0.20%.

And BofA's Michael Hartnett out with his latest edition of his popular weekly “Flow Show” series with the comment that “Global interest rates [are] at 5,000 year lows. In next 5,000 years rates will rise, but [there’s] no fear on Wall Street this happens anytime soon.” That's one way to kick off a note.

Dollar (DXY) - Dollar found some support today edging back over $92 but technicals remain bearish.

VIX - Finished up a little at 18.24.

Crude (/CL) - Was back and forth but ended up moving a little higher after yesterday's strong day settling at $73.81. Technicals continue to firm up, so I think we'll challenge $75 next week.

As both oil and gas rigs fell this month.

And EIA revises May's demand up by 7%, meaning it was actually only 1.9% lower than May 2019 demand. Amazing. BBG.

Here's a comparison. Huge uptick in NGL demand making up for the lower gasoline, etc., demand.

As US became a net importer in May with record Russian imports.

And, for XOM, while oil and gas results were very good, plastics was even better this quarter (just like they told Dustin Hoffman in the Graduate).

Nat Gas (/NG) - Consolidation around $4 we thought we'd see continues falling over 3% to $3.913/BTU. Technicals have turned a bit bearish, though, so wouldn't be shocked to see it break lower next week.

As European nat gas prices continue to push power rates up.

Gold (/GC) - After yesterday's strong day, did exactly what we didn't want to see falling back below the 50 and 200-DMAs to the 21-DEMA. Technicals are still favorable but that has to be disappointing to gold bulls on a risk-off day.

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

U.S. Data

Did report on personal income and spending/PCE today. Link below.

US Personal Income Jun: 0.1% (est -0.3%; prevR -2.2%; prev -2.0%); US Personal Spending Jun: 1.0% (est 0.7%; prevR -0.1%; prev 0.0%); US PCE Deflator (M/M) Jun: 0.5% (est 0.6%; prevR 0.5%; prev 0.4%) - Income and spending beat, PCE comes in a touch below expectations

https://sethiassociates.blogspot.com/2021/07/us-personal-income-jun-01-est-03-prevr.html

We also had final July UofM consumer expectations which pulled back from June as both current conditions and expectations deteriorated on the back of concerns about the economy and prices.

Here was the commentary. A lot of opinion on the path of inflation with a rather gloomy conclusion:

Surveys of Consumers chief economist, Richard Curtin

Consumer sentiment edged upward at the end of July, although it still posted a monthly decline of 5.0%. The largest monthly declines remained concentrated in the outlook for the national economy and complaints about high prices for homes, vehicles, and household durables. While most consumers still expect inflation to be transitory, there is growing evidence that an inflation storm is likely to develop on the not too distant horizon. The improved finances of consumers have greatly reduced consumers' resistance to price increases. While firms have reacted to their own supply and labor shortages with a greater readiness to increase prices as well as wages. Consumers and firms currently justify their actions as temporary adjustments due to the pandemic. However justified, such changes act to generate an upward spiral in prices and wages. Moreover, the fiscal and monetary policies already in place, and the likely increases and continued accommodation now contemplated, will only increase the willingness of consumers and firms to act in ways that accelerate the upward spiral in prices and wages. This reaction by consumers is unique, and quite different from the inflationary psychology of the 1970s. In that earlier era, the booms were driven by the willingness of consumers to advance their purchases in an attempt to avoid future price hikes, now the coming boom will be due to income and job gains that make price increases easier to manage, with the gains generated by federal transfers and physical and human infrastructure programs. The beneficial reduction in income inequality will shift more money to those who have higher propensities to spend, and thus energize demand. The booms will end in the same way as usual: rising prices will eventually outdistance wage gains, lowering living standards, and cause an economy-wide retrenchment in spending.

Finally, we did have Employment Cost Index which came in a bit less than expected. This is a 3-month figure. Total compensation costs were up 0.7%. Wages and salaries were up 0.9% while benefits were up 0.4%. They were up 2.9%, 3.1%, and 2.2% y/y respectively. State and local compensation was up 2.0% y/y.

US Employment Cost Index Q2: 0.7% (est 0.9%; prev 0.9%)

From the report:

Among private industry occupational groups, compensation cost increases for the 12-month period ending in June 2021 ranged from 2.4 percent for management, professional, and related occupations to 4.8 percent for service occupations. Within industry supersectors, compensation cost increases ranged from 2.6 percent for both manufacturing and professional and business services to 5.5 percent for leisure and hospitality.

And Chicago PMI jumped back up to 2nd highest reading after May's.

Next Week

We turn the page to August next week so get that normal first week of data capped by the employment reports on Friday.

I'll have more as we get closer but here's an initial teaser on expectations for Friday.

And earnings season continues. While this week was the biggest week of the season by market cap, next week is biggest by number of companies.

Overall

Beginning of the month is normally positive, but August is one of the worst months of the year normally. For now, we'll just continue following our roadmap from 3Q20 earnings season, which has been pretty accurate thus far. We're a little ahead of that chart but if the pattern holds, we could see a bigger drawdown (5-7%) starting soon. This is just a "fun" guide, so we'll see how things develop but that wouldn't surprise me at all.

3Q20 Earnings Season

This Earnings Season

And you know the "late summer playbook" by now - Expect choppiness with lots of ups and downs, but basically ending up around where we started earnings season. I continue to expect a big drawdown (10-15%) in the next several months. Also our "roadmap" says we could see 5-7% soon (which maybe morphs into the bigger decline?).

Misc.

Some other random stuff.

Repos break the $1T mark for first time ever. Probably will get some attention.