Daily Summary – August 30, 2021 - A Mixed Bag
Daily Summary – August 30, 2021 - A Mixed Bag
Please excuse typos.
After Friday's broad move higher in which most all stocks participated to some degree, the market returned to the "either/or" which we had escaped the last few days but which otherwise has characterized most of the past 12 months. It's "either" those large growth names typified by the FAANG stocks doing well "or" everything else. Today it was the former which pushed the SPX (+0.43%), NDX (+1.12%) and Nasdaq (+0.9%) to new record highs while value stocks and small caps fell, with the RUT down a half percent. It's likely 10-year yields falling back to Tuesday's levels and crude coming off a bit were at least in part to blame for the cyclical weakness.
Style box favoring large caps and growth.
As Mike Wilson continues to call for a 10% correction. While he's not the only one, I do have a tendency to pay attention to what Mike says because he's made a number of correct calls including the December 2018 correction, the March 2020 bottom, the late Summer/early Fall 2020 pullback, and most of the rally up until a few months ago. Since late Spring, though, he's been looking for the 10%+ pullback that is "normal" for this point of a rally of this type (looking at analogs such as 2010). To be fair, I have also mentioned based on those very same analogs that I thought we'd see something similar, but I have been more circumspect in my timing, constantly moving it out as conditions "weren't quite right" other than a couple of times. I still think it's more likely than not coming but I continue to think conditions "aren't quite right".
Mike though thinks they are (and has for a few months). As he noted today the pullback “has simply been deferred as excess liquidity and retail and international inflows have kept the major US indices elevated.”
To keep things interested in his most recent note he used a "by fire" or "by ice" analogy. Ice consists of slower growth in the form of "“payback in demand and weakening consumer confidence". Defensives obviously work better in that scenario. Fire consists of a strong economy which result in a Fed tightening that drives up rates (which I am dubious of as we've seen that the market thinks Fed tightening = policy mistake) and lowers equity valuations. In that scenario “you want to own cyclicals and avoid expensive long-duration growth stocks.”
In either case you get a 10% correction with the fire being the less fearsome of the two.
Major Market Technicals
As noted new ATH's for SPX, NDX, and Naz. 53rd this year now for SPX.
RUT did make a go at the 2300 level early in the session before falling back. It has a little room above support so could see it go either way tomorrow.
SPX Sector Flag
Weaker SPX sector flag which went from ten to seven green sectors with RE leading followed by those FAANG sectors. The four red sectors were our "core cyclicals" with energy and financials the only two down over -0.12% though.
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 sell longs, RSI negative, above all moving averages. Needs to hold support, did hold 20-DMA on first test.
XLRE - Real Estate - MACD go long, RSI neutral, back over 20-DMA. ATH. Upgraded today.
XLF - Financials - MACD go long, RSI neutral. Above all moving averages.
XLB - Materials - MACD go long, RSI neutral, above all moving averages.
XLY - Discretionary - MACD go long, RSI neutral, just beneath 20 DMA now.
XLC - Communications - MACD go long, RSI neutral, above all moving averages. ATH.
XLK - Tech - MACD go long, RSI neutral, above all moving averages. ATH.
- Sectors with mediocre to poor technicals but above all/most resistance.
XLP - Staples - MACD sell longs, RSI neutral, back over 20-DMA. Upgraded.
XLI - Industrials - MACD go long, RSI neutral, back above all resistance. Watching for upgrade.
XLU - Utes - MACD sell longs, RSI negative, above all moving averages. Needs to hold 20-DMA.
- Sectors with good technicals but extended (significantly overbought).
- Sectors that look to have bottomed with positive technicals but below significant resistance.
None.
- Sectors regrouping (negative technicals, short-term downtrend, long-term still positive/uptrend).
XLE - Energy - MACD cover shorts, RSI neutral, under multiple MA's but got over intermediate term trendline and shorter term RSI positive divergence. Will upgrade if it can get over $51 level (around 50 and 100 DMA's).
- 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)
Key subsectors were mixed today after all gaining on Friday. Positively retail, homebuilders, semi's and IBB all had small gains while transp and XBI pulled back, although none fell over 1%.
Breadth
After a great day Friday, breadth weaker today particularly on NYSE which had just 41% positive volume and 41% of issues today. Naz was a little better given the bias to growth with 59% positive volume, 45% of issues. Given that it's such a light trading week, I'm not going to read too much into breadth this week. I'll pay more attention next week but so far this week people are more interested in vacations than buying stocks.
Commodities/Currencies/Bonds
Bonds - Long bond yields dropped further today down to the 20-DMA down another three basis points to 1.285%. It's now on a very short term uptrend line. 2-year yield fell two basis points to 0.20%.
Dollar (DXY) - Finished flat as it sits just on the uptrend line from May after bouncing off the 50-DMA (I redrew it after I noticed it was off the bottom point). Technicals remain bearish. A break of support could see a test of $92.
VIX - Fell a bit to 16.19.
Crude (/CL) - After a back and forth session did end the day a bit higher at $69.12 WTI, but remains below significant resistance (50-DMA and $70). Technicals remain positive.
Here's current expectations (no different than what we noted this morning):
As gasoline demand starts its normal seasonal decline (although typically Labor Day week is a big travel week, so I wouldn't be surprised to see a pop from that and those stocking up in front of Hurricne Ida).
As FTC turns its attention to gas pricing and supplier consolidation.
Nat Gas (/NG) - After moving up almost 15% last week, and pushing even higher this morning, it reversed and closed down -1.6% but off the lows as it bounced off the breakout level ($4.25). At $4.316 currently. Technicals now firmly positive with just a slight RSI divergence. I'll be honest that I have no idea where it goes.
And no peak yet in European electricity prices.
Gold (/GC) - Decided to consolidate today pulling back to the 200-DMA and finishing at $1813. Technicals remain favorable.
Copper (/HG) - Up over 1% today as it continues to push through resistance, now testing the 100-DMA. Technicals are favorable. Coming up on an intermediate term downtrend line.
U.S. Data
Reported on pending home sales and Dallas Fed today. Links below.
US Pending Home Sales (M/M) Jul: -1.8% (est 0.4%; prev R -2.0%) - Pending home sales pull back in July as supply remains scarce - details
https://seekingalpha.com/instablog/15085872-cbus-neil/5633604-us-pending-home-sales-m-m-jul-minus-1_8-percent-est-0_4-percent-prev-r-minus-2_0-percent
Dallas Fed Manufacturing Survey: +9 vs. +25 consensus and +27.3 prior - Dallas Fed Mfg comes in well below expectations as supply chains and prices constrain new orders and shipments
https://seekingalpha.com/instablog/15085872-cbus-neil/5633689-dallas-fed-manufacturing-survey-plus-9-vs-plus-25-consensus-and-plus-27_3-prior-dallas-fed
Next 24
Economic data heats up next 24 hours particularly internationally. Domestically, we'll get the two home price indices for June, Conference Board consumer confidence for August, and the Dallas Fed services index also for August.
Internationally there's a lot but the highlights will be S Korean and Japanese July IP, Chinese August PMI's, German employment, UK consumer lending, and European CPI and HICP for August.
Also as discussed above we'll get an OPEC+ meeting, but as we noted not much is expected with prices having recovered (and if there was any action it would be Wednesday not tomorrow most likely).
And earnings season continues to wind down. Only about 100 reports this week again including ADR's. From Seeking Alpha
Overall
I said Friday "next week is likely to be very light volumes, and week before Labor Day generally has an upside bias, so I'm thinking we chop a little but generally drift up." So far that's accurate at least at the most widely followed headline index level (although I guess the Dow was down). So as we said it's definitely "choppy" beneath the surface.
I'll continue to track SPX progress versus our 3Q20 roadmap for now as we're not in the "clear" from that 5-7% pullback until we get through this week, but it's starting to look like that little dip we had might be all we're going to get until after Labor Day as this looks a lot like the "liftoff" we had at the end of that earnings season.
3Q20 Earnings Season
This Earnings Season
With respect to that last comment about "liftoff" here's what the chart looks like if you zoom out. We could easily see something similar here. That second arrow was the start of Q420 earnings season.
And you know the "late summer playbook" by now - Expect choppiness with lots of ups and downs, but basically ending up 2Q earnings season (which is roughly 9/12) around where we started. It's starting to look like we're going to end up at least a bit higher than where we started this time though. I continue to expect a big drawdown (10-15%) in the next several months (somehow I feel like Congress will be involved (debt ceiling? shutdown?)). Also our "roadmap" says we should see 5-7% this week but that's looking increasingly unlikely.
With respect to the "large drawdown" comment though, Congress is certainly showing some potential.
Misc.
Some other random stuff.
Repos back over $1.1T mark.
And it's not just U.S. banks that are awash with cash looking for a place to store it. As BBG reported this morning Europe is seeing something similar:
[B}anks are so flush with liquidity, they are now giving the ECB cash as collateral for the loans they receive. Yes, you read that correctly. Banks have borrowed money from the ECB -- and given the ECB the money back as collateral for the loan.
We can see this in data provided by the weekly financial statement, which has a line item called "deposits related to margin calls." In any other time, an increase in this line item would be a sign of severe stress, as it would mean the collateral banks had posted with the ECB to secure their lending had fallen so much in value, the ECB has made a margin call -- think Greek sovereign bonds circa 2011.
What the current rise is pointing to, though, is banks having nothing else to do with the cash, and by using it as security for the loan they get a handy interest rate income on the difference between the deposit rate of minus 0.5% and a TLTRO rate of potentially minus 1%. It also means that banks -- by giving the cash straight back to the ECB without doing anything else with it -- are effectively sterilizing a proportion of total liquidity the central bank provides.
Monthly balance sheet data shows that the Bundesbank accounts for all of this "margin call" cash. It will be worth watching to see if this number disappears at the end of September when banks are allowed to start making early repayments on the cash they borrowed under TLTROs in 2019 and 2020.
As EU recommends halt to non-essential travel from the US, although it's generally expected that this will not apply to vaccinated travelers. WSJ.
And Louisiana looks to start the long process of rebuilding after Ida. WSJ.
To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to https://seekingalpha.com/user/15085872/instablogs for more recent or https://sethiassociates.blogspot.com for the full history.
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