Neil's Evening Summary – October 29, 2021 - More New Highs

 Neil's Evening Summary – October 29, 2021 - More New Highs

Please excuse typos.  Continuing to try to make this more digestible for those who are not as familiar with the markets, lingo, etc.  Feel free to leave your thoughts in the comments section, they are appreciated.  Also, I don't discuss crypto extensively as I don't consider myself knowledgeable enough to talk intelligently on the subject (and there are plenty of other sources for that).

A small glossary.  Feel free to inquire about any other terms used. 

SPX = S&P 500 
Naz = Nasdaq Composite
NDX = Nasdaq 100 (100 largest stocks in the Naz)
RUT = Russell 2000 (smaller stocks) 
DMA = Daily Moving Average (the moving average over the given time period (20, 50, 100, 200 days normally))
MACD = Moving Average Convergence Divergence (basically a trend indicator)
RSI = Relative Strength Index (basically what it sounds like)

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After a strong day yesterday, gains were more subdued today, but they came on the backdrop of steep losses at the open on the heels of disappointing earnings from Apple and Amazon last night.  About an hour after the open, stocks found their footing and pushed up into the afternoon with a final drive in the last half hour that left the NDX up nearly a half percent, Naz a third of a percent, and SPX two tenths.  RUT ended up just under the flatline.  It was enough for all-time highs for the SPX, NDX, and Naz.  For the SPX, it is the 59th new high this year, 19 short of the record of 77 from 1995.  

It also gave the SPX it's best month since last November.

Clear bias to growth today despite those earnings misses.  Maybe it was all the excitement over Meta Platforms.

As Wells Fargo reiterates "melt-up" scenario.

Major Market Technicals

Not much change in the SPX, which pushed up to an all time closing high.  Daily technicals now back to fully positive although RSI is moving into overbought territory.  NDX and Naz look similar to SPX both pushing up to ATH's today as well.  Weekly technicals remain slightly negative.

RUT is back to that 2300 level it had trouble with last week.  Daily technicals remain tilted positive and weekly are very close to turning positive.

SPX Sector Flag

Pretty weak SPX sector flag today with only four green sectors (all green yesterday) and only one up over nine tenths (seven yesterday).  Large growth along with health care dominated the top.

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.  I do often buy calls though when I upgrade.  Going to keep playing with the groupings so bear with me.  Started to bold changes.  

Not much change today.  Quick look at the weekly technicals shows financials, energy, and discretionary as the three "positive" ones although discretionary is very overbought like it is on the daily chart.  A few others are close to turning positive.

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

XLV - Health care - MACD cover shorts, RSI positive divergence, above all MA's.  

XLK - Tech - MACD go long, RSI neutral, above all MA's. ATH.

XLB - Materials - MACD go long, RSI negative divergence, above all MA's. 

XLE - Energy - MACD sell longs, RSI negative divergence, over all MA's.  

XLF - Financials - MACD go long, RSI negative divergence, over all MA's. 

XLI - Industrials - MACD go long, RSI negative divergence, above all MA's.  

XLY - Discretionary - MACD go long, RSI over to under 70, above all MA's.  All-time closing high.

XLRE - Real Estate - MACD go long, RSI positive negative divergence, above all MA's. 

XLU - Utilities -  MACD go long, RSI positive, above all MA's.  

XLP - Staples - MACD go long, RSI positive, above all MA's.  

- Sectors with mediocre to poor technicals but above all/most resistance.

- Sectors that look to have bottomed with positive technicals but below significant resistance.

XLC - Communications - MACD cover shorts, RSI negative divergence, under multiple MA's. 

- Sectors regrouping (negative technicals, short-term downtrend, long-term still positive/uptrend).

- 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 (smaller/larger bios), XHB (homebuilders), XRT (retail) 

More subdued day, with none up or down over 1% except XBI which was down -1%.  IBB, IYT, XHB also red while SOX and XRT were green.  XRT was up close to 1%.

Breadth

As we've seen for the past week, breadth highlighted by Naz volume.  NYSE which had a decent day yesterday back to really poor.  On NYSE volume was 37% positive and issues 47%.  Naz was 59% positive volume, issues 48%.  Naz volume was ok, the rest were poor, particularly the NYSE volume.  That is poor volume three of the last four days.

And that lagging breadth on the NYSE is one thing that makes me a little more cautious.  Something to keep an eye on (h/t Helene Meisler).  

Commodities/Currencies/Bonds

Bonds - For a second day yields moved higher in the morning before giving it back.  2-year yields fell two basis points at 0.48% (0.5% is post-pandemic high), 5-year yields were flat at 1.18% (1.22% is post-pandemic high), 10-year yields were down two basis points to 1.55%, and 30-year yields continue to sell off down another three basis points to 1.93% after falling ten basis points yesterday to lowest since September.  The inversion with the 20-year increased a bit more also to five basis points.

As BofA noted this week the largest inflow to TIPS in 13 weeks.

Dollar (DXY) -  After selling off yesterday, got it all back and more today pushing through the 20-DMA and $94 level with a big move. Closed at $94.13.  Daily technicals remain negative. Weekly technicals remain positive. 

VIX -  After moving higher in the morning settled back to finish down a little.  Wonder if that's all we'll get in terms of a move up.

Crude (/CL) -  After falling again this morning to its uptrend line, bounced again to finish mildly green for the day at $83.22 WTI despite the strong dollar.  Technicals remain negative on daily chart with RSI negative divergence and MACD in sell longs positioning.  Weekly technicals remain positive but overbought.  

As WTI finished up around 10% for the month.

As through Wednesday money managers reduced positions in WTI modestly.  We'll hopefully get full update from John Kemp on Monday.

And all that refining capacity that was shut after the pandemic (which was needed to be shut as there was overcapacity) has gotten refiners back to profitable, something they weren't really before the pandemic.  BBG.

Globally, about 2.3 million barrels a day of refining capacity was shut during the pandemic and another 1 million barrels are likely to be shut in the next year, Facts Global Energy analyst Steve Sawyer said. That’s just as demand is returning to pre-pandemic levels. Fuel demand is soaring, with cars jamming roads again and gas-to-oil switching gaining speed ahead of winter.

As a result, refiners are enjoying hefty margins —  a welcome change after a challenging 2020. In the U.S., the Nymex gasoline crack, a rough gauge of the margin refiners can capture with a barrel of crude based on futures prices in New York, was trading above $16 a barrel on Thursday, the highest since 2017, seasonally. Margins are also rising in Asia and Europe, where shortages of coal and natural gas are boosting the demand outlook for diesel, kerosene and propane ahead of winter.

The rising margins signal that crude oil demand will remain strong as refiners continue to process more to meet consumption needs. That could mean that global oil stockpiles will continue to fall in the coming months. Gasoline balances worldwide are set to tighten significantly over November and December, according to Energy Aspects. 

Nat Gas (/NG) - After falling almost -7% yesterday fell another almost -4% today as European nat gas finished down even more.  Did finish off the lows recovering its 20-DMA.  Ended at $5.67.  Daily technicals now back to negative.  Hard to keep up.  Weekly technicals positive but very overbought.

Gold (/GC) -  Finished down almost -1% probably associated with the strong dollar. Ended at $1785.  Daily technicals have turned mixed as are weekly.

Copper (/HG) -  Tested the 50-DMA area again which held again but closed down over one percent.  Daily technicals remain negative with MACD sell longs signal and RSI negative.  Weekly are not much better.

U.S. Data

Did reports on Personal Income and Spending for September, PCE Prices for September, and the final University of Michigan Index of Consumer Sentiment for October.  Links below.

US Personal Income Sep (M/M): -1.0% (est -0.3%; prev 0.2%); Personal Spending Sep: 0.6% (est 0.6%; prev 0.8%; prevR 1.0%) - Income falls on end of pandemic benefits, spending up nevertheless - Neil's Summary

https://sethiassociates.blogspot.com/2021/10/us-personal-income-sep-mm-10-est-03.html

US Univ. Of Michigan Sentiment Oct F: 71.7 (est 71.4; prev 71.4) - Final UofM consumer confidence comes in around preliminary estimates - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5656725-us-univ-of-michigan-sentiment-oct-f-71_7-est-71_4-prev-71_4-final-uofm-consumer-confidence

Next Week

Another busy week next week.  Highlights will be PMI's and of course the jobs reports.  But we do get a Fed meeting in the middle of the week that will be heavily watched as specifics around tapering are unveiled.

Internationally, will also be busy with PMI's, central bank meetings in Australia and England, and a slew of other reports.

Also, over the weekend the G-20 will be meeting.  It kicked off today with little progress (below).  Next week will be the big UN COP26 climate summit in Glasgow.  BBG.

Negotiations at the Group of 20 summit in Rome dragged past midnight into Friday, stuck on energy and climate. Some countries singled out China, saying it is refusing to beef up commitments to limit temperature increases and digging in over coal.

The countries are set to commit to ending international funding for coal-fired power plants overseas but are struggling to agree on a date by when they’ll ditch supporting it at home, according to officials briefed on the talks.

In short, there is no progress from a meeting of environmental ministers three months ago, and with signs of a blame game starting to form, there is limited scope for the sherpas -- as the officials doing the leg work on the communique are known -- to make any progress. Wanting overseas coal addressed was formally raised by Italy back in July.

The difficulties facing negotiators are underscored in a new version of the draft conclusions which dates from the end of Thursday night’s talks and was seen by Bloomberg News. The section on energy and climate has shrunk to less than one line, and remains “under discussion.” Officials briefed on the discussions said the Chinese delegation was the main obstacle, but they had support from other countries including Russia and India. 

Diplomats from Italy, the host nation, are pushing to keep a reference to limiting global warming to 1.5 degrees within reach by 2050, two people said. The fact that even something so underwhelming and uncontroversial is running into opposition does not bode well for talks that will then roll into the UN’s COP26 climate summit in Glasgow, Scotland, next week and are designed to improve on the goals set under the 2015 Paris climate accord.  

The main climate and energy debate is between developing and developed countries because “we are in the same storm but not in the same boat,” Russian sherpa Svetlana Lukash told reporters in Rome on a conference call Friday. The latest talks “show that developed nations understand that we all need to respect each other’s national situations,” she said. 

And noted the OPEC+ meeting that takes place next week in the morning summary.  See that for more details but short of it is expectations are for no change to the scheduled 400kbd increase for December.

And Japan will have an election Sunday.  BBG.

Investors are nervously training their sights on Japan’s general election on Sunday, with the prospect of a surprise outcome creating choppy moves in recent days.

Japan’s ruling party is facing voters for the first time in about a decade without Shinzo Abe at the fore. The markets are uncertain on what to expect from newly elected Prime Minister Fumio Kishida, with the Topix down almost 2% since he was chosen to head the Liberal Democratic Party. In the same period, the MSCI Asia Pacific Index advanced 1%.

That’s made investors anxious in a country where the LDP has ruled for all but four of the past 66 years. Recent surveys have highlighted that voters aren’t crazy about Kishida. Opposition parties, while also lacking a charismatic leader, are this time better coordinated than in recent years. 

And earnings season continues with the names getting smaller in market cap, but larger in terms of number.  I'll post a more detailed list on Monday.

Overall

As you know, last week I changed my "roadmap" to a focus on earnings season which has often seen weakness sometime within the first couple of weeks.  Here's that chart showing the earnings season starts over the past year (arrows indicate the start).  That dashed line is 2020/2021, so first arrow is last October's earnings season.  I'll leave it up as we move through the season.

We had been bullish for a continuation of the rally until last Friday, when we turned incrementally cautious for reasons you know.  I still feel like some sort of pullback similar to what we've seen every other earnings season is likely to happen in the next month, but timing it is of course tricky.  

On the positive side, we continue to have a solid tailwind from earnings, volatility remains low (and one and three-month lookback realized volatility continues to trend lower), daily chart technicals remain solid at the index level, and sector charts continue to be by and large in good shape.    

That said, we're starting to get overbought on the headline indices, NYSE breadth has been very weak three of the last four days, and sentiment is getting a bit frothier.  We noted the NAAIM survey yesterday and the equity put/call ratio was the lowest since June.

I haven't talked much about it, but I don't really hedge.  I do have a little larger cash position today than I did a week ago, but that's mostly just a function of stocks hitting price targets.  So when I say I'm cautious, it just means I'm not super enthusiastic about buying, but I'm not buying puts or anything.  So I'm cautious, but as I said yesterday, the bulls remain in control for now.

Misc.

Other random stuff.  

Repos pop back up to highest level of the week but remain under the $1.67T high water mark.

And while we haven't had a 10% drawdown in the headline indices this year, 90% of stocks in the big cap indices have and only 2% of RUT stocks haven't with the AVERAGE drawdown for the RUT and Naz 35 and 39%.

And Canadian GDP came in light today.

Canadian GDP (M/M) Aug: 0.4% (est 0.7%; prev -0.1%)

- GDP (Y/Y) Aug: 4.1% (est 4.3%; prev 4.7%)

As FDA authorizes Covid vaccine for 5-11.  Just needs CDC sign-off which will come very soon.  WSJ.

The Covid-19 vaccine from Pfizer Inc. PFE 1.30% and BioNTech SE BNTX -1.85% was authorized for use in children as young as 5 years old, the first shot that federal health regulators have permitted for them in the U.S.

The decision by the Food and Drug Administration on Friday for children age 5 to 11 paves the way for one of the last remaining groups in the U.S. to get vaccinated against Covid-19, probably starting within days.

The shot works safely, the FDA said. Once the Centers for Disease Control and Prevention gives its signoff, expected within days, the young children can begin getting their first dose.

The children will be given two shots three weeks apart, the same schedule as adults and adolescents, although each shot will contain one-third of the dosage.

Which should add to the recent surge in vaccinations.

 

And more supply chain greenshoots.

As Japan, US, and India keep the pressure on OPEC+.  BBG.

For the past year, oil consuming countries have become increasingly anxious at crude’s resurgence: first to $50 a barrel, then $75 and now to more than $85. And when Vladimir Putin, one of the leaders of the OPEC+ cartel, warned that $100 a barrel was a distinct possibility, the alarm bells really started ringing. 

Now, as quickening inflation pushes some central banks toward earlier-than-expected interest rate hikes, the U.S. India, Japan and other consuming countries are putting the strongest diplomatic pressure on the cartel in years.

Behind closed doors, an intense campaign is being waged to persuade OPEC+ to speed up its output increases, according to multiple diplomats and industry insiders involved in the contacts. The cartel, which meets virtually on Nov. 4 to review policy, is currently boosting output at a rate of 400,000 barrels a day each month. 

The private efforts come on top of recent public appeals. The Biden administration is increasingly alarmed by rising gasoline prices that have reached a 7-year high, and has been calling on OPEC+ for weeks to pump more oil. Japan, the world’s fourth-largest oil consumer, took the rare step of adding its voice to those calls in late October -- a first for Tokyo since 2008. India, the third-largest consumer, has also asked for more crude. China has been silent in public, but is equally vocal in private, diplomats said. 

“We found ourselves in an energy crisis,” Amos Hochstein, the top U.S. energy diplomat, said this week, reflecting a view broadly held view by big oil consuming nations. “Producers should ensure that oil markets and gas markets are balanced.” 

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.