Neil's Evening Summary – November 3, 2021 - Another Round of ATH's Please

 Neil's Evening Summary – November 3, 2021 - Another Round of ATH's Please

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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Note there will be no evening summaries Thursday or Friday as I'll be traveling although I might do some sort of update before Monday.  No morning summary on Friday either.

The earnings season rally rolled on for another day with markets soothed by a "no surprises" Fed meeting, responding with a solid push higher and treating market participants to a second day of all-time highs on the Dow, SPX, Naz, NDX, and RUT for the first time since January 2018.  The latter four were up +0.6%, +1.04%, +1.08%, and +1.8% respectively.   

This was also the 62nd new high for the SPX this year, now 16 short of the annual record.   

Here's an intra-day chart of the SPX.  Can you spot 2pm (initial spike) and the press conference (big ramp)?

Style box a bit all of the place again today other than small caps which dominated.

Major Market Technicals

Not much change in the SPX, NDX, or Naz which all remain at ATH's and overbought.  Here's a one-year chart, you can see the SPX is at the most overbought it's been all year, as are NDX and Naz.

RUT also put a stamp on yesterday's modest push to ATH territory, but is now also dipping a toe into overbought territory.  

SPX Sector Flag

Despite the stronger day, SPX sector flag had fewer green sectors (eight versus nine yesterday) and again just two up over nine tenths.  No sector down more than -1% again today.  Also it was another day of not "either/or" with cyclicals, defensives, and growth mixed pretty evenly.

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 too much change.  Couple of more sectors moved into overbought territory.  Energy getting close to a downgrade, but will hold off as long as it can stay above the 20-DMA.

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

XLV - Health care - MACD go long, RSI positive overbought, above all MA's.  

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

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

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

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

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

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 very overbought, negative divergence, above all MA's.  

XLU - Utilities -  MACD go long, RSI negative divergence, 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.  Getting close to an upgrade if it can put a couple of good days together.

- 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) 

Another strong day with retail leading up almost 4%, XBI over 2%, and SOX, IBB, and IYT up over 1%.  Homebuilders "lagged" up seven tenths.

And the big day for XRT pushed it out of a 6-month consolidation to a new ATH.

Breadth

Breadth improved today and was good but not great.  On NYSE volume was 69% positive and issues 63%.  Naz was 67% positive volume, issues 65%.  Would have liked to see those at least in the 70's.

% over 50-DMAs continue to make progress as of this morning.

Commodities/Currencies/Bonds

Bonds - Moved higher along with stocks today with a bear steepener.  2-year yields were up one basis point to 0.47% (0.5% is post-pandemic closing high), 5-year yields up four basis points to 1.19% (1.22% is post-pandemic high), 10-year yields up four basis points to 1.60%, and 30-year yields up four basis points to 2.0%.  The inversion with the 20-year remained at one basis point.

As JPM continues to say fade the high inflation.

Dollar (DXY) -  Moved lower today remaining in range of this week.  Closed at $93.86.  Daily technicals remain negative. 

VIX -  As stocks went up today, VIX fell sharply, back down to around last week's lows at 15.10.

Crude (/CL) -  After breaking its uptrend and 20-DMA this morning, acted liked stops were hit, falling all day to end down -4.5% to 80.11 WTI.  Technicals solidly negative on daily chart.  $80 is very mild support but very well may trade down to the $77 breakout level.

As global inventories continue to draw down.

Nat Gas (/NG) - After bouncing strongly yesterday off the 50-DMA, up another 3% today and pushing through the 20-DMA.  Ended at $5.86.  Daily technicals remain negative.  

Gold (/GC) -  Noted yesterday it was trading "heavy" and that accelerated today, falling through support and out of the range of this week.  Finished at $1770.  Daily technicals have now turned negative.

Copper (/HG) -  After falling through the 50-DMA (and 100) was able to just recover them.  We'll see if it can hold this area, but looking less likely now.  Daily technicals remain negative with MACD sell longs signal and RSI negative.  

U.S. Data

Did reports on ISM and Markit final Non-Manufacturing Indexes for October, the ADP Employment Change report for October, Factory Orders for September, and the weekly EIA report.  Links below.

US ADP Employment Change Oct: 571K (est 400K; prev 568K; prevR 523K) - "The job market is revving back up" - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5658457-us-adp-employment-change-oct-571k-est-400k-prev-568k-prevr-523k-job-market-is-revving-back-up

US Markit Composite PMI Oct F: 57.6 (prev 57.3) Markit Services PMI Oct F: 58.7 (est 58.2; prev 58.2) - Services improves a bit on flash estimates, remaining strong - Neil's summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5658488-us-markit-composite-pmi-oct-f-57_6-prev-57_3-markit-services-pmi-oct-f-58_7-est-58_2-prev

US ISM Services Oct: 66.7 (est 62.0; prev 61.9) - Record high for ISM services index - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5658501-us-ism-services-oct-66_7-est-62_0-prev-61_9-record-high-for-ism-services-index-neils-summary

US Factory Orders Sep: 0.2% (est 0.1%; prev 1.2%; prevR 1.0%); US Durable Goods Orders Sep F: -0.3% (est -0.4%; prev -0.4%) - Transportation orders weak but otherwise solid factory orders and business cap ex - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5658510-us-factory-orders-sep-0_2-percent-est-0_1-percent-prev-1_2-percent-prevr-1_0-percent-us

US DoE Crude Oil Inventories (W/W) 3- Nov: 3290K (est 2250K; prev : 4268K) - Another build in crude inventories with overall petroleum inventories remaining around flat levels - Neil's summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5658645-us-doe-crude-oil-inventories-w-w-3-nov-3290k-est-2250k-prev-4268k-another-build-in-crude

And on the Fed meeting, it was remarkably unsurprising, a testament to the carefully crafted messaging from Powell and the rest of the Fed.  Tapering will start immediately, as was widely expected, following the "hypothetical path" laid out in the previous meeting of reducing Treasury purchases by $10 billion and mortgage-backed securities by $5 billion.  Of course they left themselves optionality saying the pace of tapering could speed up or slow down.  I'm surprised they didn't add that such a change would be well telegraphed.  The decision was unanimous.

Powell declined to push back specifically on market expectations, which after the meeting call for two rate rises by the end of next year, simply noting that “We think we can be patient. If a response is called for, we will not hesitate,” and “[w]e don’t think it is a good time to raise interest rates because we want to see the labor market heal further."  

On inflation the statement was basically a carbon copy but did add an extra sentence.  After noting as the last statement did that “Inflation is elevated, largely reflecting factors that are expected to be transitory,” it added “[s]upply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”  Powell told reporters that supply constraints have been larger and longer lasting than anticipated, but “like most forecasters we continue to believe that our dynamic economy will adjust to the supply and demand imbalances.”  He also added, rightly, that “[o]ur tools cannot ease supply constraints."  

But he did refreshingly nod to the tension between trying to not short circuit the recovery and the inflation it may be facilitating, noting "[w]e accept accountability for inflation in the medium term,” adding that “the level of inflation that we have right now is not at all consistent with price stability.”  And he finally gave at least some definition of "transitory" - "Really for us what ‘transitory’ has meant is that it won’t leave behind permanently high inflation.”  He noted in no circumstance would the Fed permit high inflation to “become a permanent feature of life”.

There was no update to the dot plot or economic forecasts at this meeting.

Also noted the mortgage apps this morning came in lower w/w again this week.  The details were refis fell by -4% w/w and are down -33% y/y while purchase apps were down -2% and are down -9% y/y.  Here was the commentary:

“Mortgage rates decreased for the first time since August, as concerns about supply-chain bottlenecks, waning consumer confidence, weaker economic growth, and rising inflation pushed Treasury yields lower. Most of the decline in rates came later in the week, which is likely why refinance applications declined to the lowest level since January 2020, and the overall share of activity fell to the lowest since July 2021,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Government refinance applications fell for the sixth straight week, as it becomes evident that an increasing number of borrowers have already refinanced.”

Added Kan, “Purchase activity continues to be held back by high prices and low for-sale inventory, but current applications levels still point to healthy housing demand. MBA is forecasting for a record $1.6 billion in purchase mortgage originations this year, and sustained demand leading to another record year in 2022.”

 

Next 24

A little lighter day tomorrow.  In the US we'll get the weekly Initial and Continuing Claims, preliminary Productivity and Unit Labor Costs for the third quarter, the Trade Balance for September, and Challenger job cuts for October.  

Internationally, we'll get a good amount of Australian data, European services PMI's, and German factory orders as highlights. 

And the BoE will have their highly anticipated meeting.  Sounds like a coin flip as to whether they decide to raise rates or not.

Finally, OPEC+ will have their scheduled meeting to decide December production.  No change to the 400kbd scheduled is expected.

And earnings season continues with the names getting smaller in market cap, but larger in terms of number.  Here's a few notables from Seeking Alpha.

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 week when we turned incrementally cautious for reasons you know.  So far that continues to have been the wrong call.  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 boy it's starting to look foolish.

We continue to have a solid tailwind from earnings, volatility remains low (and one and three-month lookback realized volatility continues to remain subdued), daily chart technicals remain solid at the index level, and sector charts continue to be in good shape.  And we added a breakout to a new ATH in the small caps and Dow Theory buy signal to the "positive" pile yesterday.  Breadth also was at least ok today.  So bulls remain in control. 

But I can't help but notice how overbought things have gotten.  We can't go up forever so some sort of pullback or at least consolidation will happen at some point, but with a market this strong it'd be a big surprise if it doesn't get bought quickly.

Misc.

Other random stuff.  

Repos remain in the $1.3T area for a third day.

As housing market stays robust with 25% of new listings into contract "immediately".

Although time to sell on average is ticking up as is normal seasonally (although we didn't see it last year).  

And Google searches for employment hitting new highs for the year.

As Chase card spending tracker continues to move in the right direction.

And latest supply chain green shoot.

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.