Neil's Evening Summary – November 29, 2021 - We Got A Bounce, Now What?

 Neil's Evening Summary – November 29, 2021 - We Got A Bounce, Now What?

Please excuse typos.  Mornings are tilted more international, evenings more U.S.  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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I noted on Friday that "we did have a 90% down day ... which is often good for a bounce," and that's just what we got, at least in the early part of trading, as the market unwound a portion of (or all of in the case of large cap growth stocks) last Friday's moves.  But further upside looks like it may be a little more difficult in the more Covid sensitive areas, as the bounce was sold in the value and small caps names, with the RUT in particular giving up the entirety of its gains, finishing just under unchanged for the day.  NDX, which wasn't sold down nearly as much on Friday, continued to outperform up over 2% and the Naz was not far behind.  The SPX finished up over 1%.

Style box shows the tilt to growth and larger caps.

I noted Goldman and some others this morning saying they weren't changing their modeling based on Omicron.  UBS was out today saying the same thing - “Given currently available information, our base case is that Omicron does not warrant a change in our view that the global economy is on a (bumpy) road to full reopening and that growth will be robust.” 

And the WH was out today saying lockdowns are "off the table" and recommending "no change to holiday travel plans".

And Jeff Hirsch notes that a red Black Friday on average means a green December.

The market tends to rebound after a decline on Black Friday. S&P 500 suffered its worst decline on the day after the Thanksgiving holiday (AKA Black Friday, not to be confused with the Black Friday gold panic of September 24, 1869 of which the song is about). But as you can see in the table here the market has rallied from these Black Friday declines in 15 of the 21 occurrences since 1949 or 71% of the time for an average gain [through year end] of 2.6%. The worst of the 6 declines in 1973, 2002 and 2018 came in years when the market was already down at this juncture. If the market can find support here and the new Covid-19 Omicron variant does not prove to be more lethal or contagious or resistant to the vaccines the market should resume the rally and make a run at new all-time highs.

Major Market Technicals

SPX and Naz both recovered to their 20-DMAs but failed there, so that sets up as some resistance to move higher from here.  Daily technicals remain negative.

NDX was able to get back over its 20-DMA.

While RUT as noted gave up the entirety of its bounce, remaining below its 50 and 100-DMAs.  So remains right in the middle of its range from this year before the false breakout in late October.  Daily technicals remain solidly negative but at least are getting oversold.  

SPX Sector Flag

Positively, every SPX sector was up today (opposite of Friday), with four up over 1% and one over 2% (tech).  Top was a mix of large growth and defensives though.  Not a ringing endorsement for risk taking.  

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.  

Some improvement but not enough to change too much.

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

XLK - Tech - MACD sell longs, RSI negative divergence, above all MA's. On watch for downgrade.

XLY - Discretionary - MACD sell longs, RSI negative divergence, above all MA's .On watch for downgrade.  

XLU - Utilities -  MACD flat, RSI negative divergence, above all MA's. 

XLRE - Real Estate - MACD sell longs, RSI negative divergence, above all MA's. On watch for downgrade.

XLV - Health care - MACD sell longs, RSI negative divergence, under 20-DMA.  On watch for downgrade.  

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

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

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

XLP - Staples - MACD sell longs, RSI negative divergence, under multiple MA's.

XLB - Materials - MACD sell longs, RSI negative divergence, under 20-DMA. 

XLI - Industrials - MACD sell longs, RSI negative divergence, under 20-DMA. 

XLE - Energy - MACD sell longs, RSI negative divergence, under 20-DMA. 

XLF - Financials - MACD sell longs, RSI negative divergence, under multiple MA's. 

XLC - Communications - MACD go short, RSI neutral, under multiple MA'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 (smaller/larger bios), XHB (homebuilders), XRT (retail) 

XBI big loser down over -1%.  XRT also red down a half percent.  Semi's the big winner up over 4%. IBB was up solidly also while tranp and homebuilders were basically flat.

Breadth

Breadth was not good.  On NYSE volume was just 47% positive and issues 53%.  Naz was 50% positive volume, issues 41%.  I guess at least the NYSE issues were green despite the RUT finishing a bit red, but c'mon, this is the best we can do on a bounce back day?  The barely positive volume (and negative issues) on the Naz on a day it was up almost 300 points is just not good.

Commodities/Currencies/Bonds

Bonds - Yields increased across the curve today but like most stocks finished off the highs not coming close to making up the moves from Friday.  2-year yields were up one basis point to 0.50% after falling fourteen basis points Friday, 5-year yields were up two basis points to 1.18% (after falling eighteen Friday), 10-year yields were up four to 1.52% (after falling sixteen Friday), and 30-year yields were up four basis points to 1.87% (after falling thirteen Friday).  The inversion with the 20-year remained at six basis points.

Dollar (DXY) -  Like stocks got back some but not all of the losses from Friday increasing to $96.20.  Remains though in short and intermediate-term uptrends.  Daily technicals mixed.

VIX -  After it's biggest move up since January, fell back but remained above 20 at 22.96.  If past is prologue, this will continue to move back down to sub-20.

And noted BBG this morning, and CS is also out with a note on success in buying the volatility spike.

Crude (/CL) -  After its worst day since March 2020, WTI at one point was up over 5% before falling back to finish up around half that much.  It did in the after hours though at least retake the $70 level to close today at $70.06.  It is now right on its 200-DMA.  Daily technicals are negative but RSI did go from under to over 30 which is considered bullish.  Lots of prior support that's now resistance though.

And as OPEC+ meets later this week, Russia and Saudi Arabia both out saying they are not particularly concerned about omicron.

  MOSCOW/LONDON, Nov 29 (Reuters) - Russia and Saudi Arabia signalled on Monday there was no need for OPEC+ to race to adjust oil output policy this week, as crude prices rebounded from last week's slide with the worst fears about the impact of the Omicron variant on demand easing.

Oil prices rebounded on Monday after tumbling on Friday by more than 10% alongside other financial markets in their largest one-day drop since April 2020 as the new variant added to concerns about a possible supply glut.

Russian Deputy Prime Minister Alexander Novak was quoted as saying on Monday that he sees no need for urgent action on the oil market over Omicron, downplaying the possibility of changes to an OPEC+ oil supply deal this week.

Saudi energy minister Prince Abdulaziz bin Salman al-Saud said on Monday he was not worried about the Omicron, Asharq Business reported, but he declined to comment on OPEC+ plans.

Saudi Aramco CEO Amin Nasser said on Monday that oil markets had overreacted to the new variant, according to Al Arabiya TV.

And since the SPR has been a hot topic, thought I'd mention that the Infrastructure Investment and Jobs Act, passed earlier this month, includes a provision to draw down 87.6 million barrels of crude oil from the U.S. Strategic Petroleum Reserve (SPR) in fiscal years (FY) 2028 through 2031.  It's felt that the current stockpile is no longer needed given US imports and exports are roughly equal (the IEA of which the US is a member requires a 90-day buffer).  EIA.

Nat Gas (/NG) - A combination of a bearish (warmer) weather forecast and the rolling of the futures contract saw a huge move down today of almost -11%.  Back to just above the 100-DMA/uptrend line.  Daily technicals could go either way at this point.  Finished at $4.88.  

And while there are huge supply concerns in Europe, the "widow maker spread" (which is the difference in the March/April contracts that is used to signal how low storage is estimated to be at the end of winter in March before recovering in April) has now flattened to just 41 cents, around 20% of the highs. 

BBG - "Much of the U.S. should see milder-than-usual weather this week, with temperatures expected to peak in the 50s Fahrenheit in Minneapolis and Chicago, according to the Weather Channel. The western half of the country should continue to see above-normal temperatures at least through Dec. 13, private forecaster Commodity Weather Group said in a note to clients.

“Particularly mild weather from Wednesday to Friday will decimate physical market demand and intensify downward pressure on Henry Hub spot prices,” EBW AnalyticsGroup said in a note to clients. 

“The downward pressure should remain,” said John Kilduff, founding partner at hedge fund Again Capital in New York. December start is looking like a “bust in terms of gas demand,” while storage levels have improved this fall, he added. “We’re decently supplied now.”

Gold (/GC) -  Continues to trade just above the uptrend line dating to the summer.  Finished down a little at $1786.  Daily technicals remain negative.

Copper (/HG) - Like oil got a bounce but got back just a portion of the selloff from Friday.  Remains in an intermediate term uptrend.  Daily technicals are barely positive. 

U.S. Data

Did report on pending home sales and Dallas Fed manufacturing survey today.  Links below.

US Pending Home Sales (M/M) Oct: 7.5% (est 1.0%; prev R -2.4%) - Pending home sales jump again in October - Full year on pace for the strongest in 15 years - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5668782-us-pending-home-sales-m-m-oct-7_5-percent-est-1_0-percent-prev-r-minus-2_4-percent-pending

US Dallas Fed Mfg Gen Bus Activity Nov: 11.8 (est 15.0; prev 14.6) - Dallas Fed Manufacturing Biz Conditions Slip But Components Remain Solid - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5668770-us-dallas-fed-mfg-gen-bus-activity-nov-11_8-est-15_0-prev-14_6-dallas-fed-manufacturing-biz

Next 24

Tomorrow in the US we'll get the September FHFA Housing Price Index (prior 1.0%) and September S&P Case-Shiller Home Price Index (Briefing.com consensus 19.3%; prior 19.7%) at 9:00 ET, followed by November Consumer Confidence (Briefing.com consensus 111.0; prior 113.8) at 10:00 ET.  

Internationally, we'll get industrial production from S Korea and Japan for October (and S Korean retail sales), Chinese November PMI's, October EU, French and Italian CPI, French 3Q GDP, and November German employment.

And earnings continue to roll in.

Overall

As you know, at the start of earnings season I changed my "roadmap" to a focus on the previous four earnings seasons which had seen weakness sometime within the first couple of weeks and/oror at the very end.  Below is 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 3Q20 earnings season.  I said I would leave it up as we move through the season, so I continue to (we're just about done now), but it's pretty clear using the prior seasons as a roadmap of any kind was not the right call at least up until now.  But I have noted last week or so that the very end of earnings season often has seen some weakness as well, so I guess that part is playing out somewhat.  I noted on Friday I think this dip may look like those other ones (circled) when it's all said and done.

But absent finding out that this variant will be dramatically different from the previous ones, I'm sticking with a bias to the upside, particularly as we've now wrung out some of the froth from the market. We know that systematic strategies derisked into the selloff on Friday, so once we find a bottom they now have room to reengage like we saw in October.  According to Charlie McEligott, volatility targeting strategies were down to the 77th percentile coming into today from 98th early last week. 

And we haven't seen any tightening in financial conditions.

But I have trouble ignoring the very weak breadth today or the fact the small caps gave up the entirety of their bounce.  It makes me feel like we have some more work to do before we get back to moving higher.  Of course, everything is dependent on a finding that the omicron variant is similar to delta (i.e., does not completely evade vaccines, is not significantly more deadly, etc.).  But as long as that is the case, I think pullbacks will be contained to the lows of Friday (maybe a little lower), and we'll eventually resolve to the upside.

Misc.

Other random stuff.  

Repos remain at $1.45T.

And Chris Verrone notes the gap between growth and value performance is very different between the largest and smallest companies (h/t Dave Wilson).

Size matters more than usual when comparing U.S. growth and value stocks, according to Chris Verrone, head of technical and macro research at Strategas Research Partners LLC. Verrone compared ratios for companies in the Russell 1000 and Russell 2000 indexes in a Twitter post Tuesday. The Russell 1000’s growth-value gauge climbed 20% through Monday from this year’s low, set March 8, according to data compiled by Bloomberg. In the same period, the comparable ratio for the Russell 2000 fell 1.5%. “Growth vs. value looks very different the further you move away” from the largest companies, he wrote.

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