Neil's Evening Summary – November 30, 2021 - Is it Friday Yet?

  Neil's Evening Summary – November 30, 2021 - Is it Friday Yet?

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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Traders who thought the post-Thanksgiving trade would be a nice slow grind up into the New Year are getting a small reprise of 2018 when stocks did the opposite.  Equities were hit on two fronts today.  The morning started off on the wrong foot when Moderna's CEO made what I think were some unfortunate comments about an expected "material" drop in vaccine effectiveness (without any actual evidence of this).  This saw a bid into bonds, sales of cyclicals and other "reopening" stocks as well as oil and other "risk on" commodities.  Stocks sold off into the close finishing at their lows.

And then we got the testimony.  Jerome Powell joined Janet Yellen in front of the Senate Banking Committee, and while his prepared comments were taken as dovish, with a focus more on the new variant's potential to slow growth, today he seemed more focused on getting the bond market, which had reversed out much of the "quicker taper" trades that had been priced in pre-Thanksgiving, back to expecting a quicker taper and likely mid-2022 rate rise.  He not only explicitly stated that the quicker taper "would be discussed", he also made it 100% clear that inflation was now considered a much bigger problem than it was even a month ago, going so far as to say the "transitory" was "officially retired".  To say this was a bit jarring is an understatement.  Bonds sold off, and stocks in general did as well, and it appears in the end the Chair was not able to avoid some level of "Taper Tantrum".  More on that below.  As Ryan Detrick summarized it - “Powell just added gasoline to the fire by finally admitting that inflation isn’t going away as fast as anyone would like,” said Ryan Detrick, chief market strategist at LPL Financial. “A faster tapering is probably coming as a result, and that has markets worried the punch bowl is leaving the party.”

In the end, the RUT and NDX were down just shy of -2% while the Naz and NDX were down a little over -1.5%.

Style box shows the widespread carnage.

But there's always hope right?

And from BBG.

For all the market chaos of 2021, it’s also been a year of weird predictability. For a while, you could set your watch by mid-month options-related volatility. Another notable pattern has been the success of reopening trades when the calendar changes.

Small-cap stocks have been beneficiaries. Since January, the Russell 2000 has climbed an average of 1.2% on the first of the month, rising nine out of 11 times, compared with an average gain of 0.1% on any other randomly chosen day. The tendency was noted in a tweet by veteran market watcher Helene Meisler.

Major Market Technicals

SPX fell under Fridays lows now just above the key 4500-4545 area which was the breakout level in late October and where the upwardly rising 50-DMA is located.  Daily technicals remain negative.

Naz and NDX both broke below their 20-DMAs but were able to stay above Friday's lows, which also (for the Naz) is the breakout level.  Naz below.

And RUT traded well below the Friday lows and came close to its trendline that has held all year.  I really hope that holds.  Daily technicals remain solidly negative but now are very oversold (most since last March).  As a side note, the RUT tied for the 4th fastest correction in its history.  

SPX Sector Flag

One of the ugliest SPX sector flags I've seen.  Straight out of March 2020.  There were seven green stocks in the SPX.  Seven.  Eight sectors had no green.  Ten of eleven were down over -1% (and tech was down nearly nine tenths).  Eight were down at least -2%.  Just ugly.

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.  

More downgrades.  Now only two sectors not in the worst (other than bear market) category. Comm's has completely lost all support.

- 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, 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).

XLU - Utilities -  MACD sell longs, RSI negative divergence, under 20-DMA.  Downgraded today 

XLRE - Real Estate - MACD sell longs, RSI negative divergence, under 20-DMA.  Downgraded today.

XLV - Health care - MACD sell longs, RSI negative divergence, under multiple MA's.  Downgraded today.

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

XLB - Materials - 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. 

XLI - Industrials - MACD sell longs, RSI negative divergence, under multiple MA's. 

XLC - Communications - MACD go short, RSI negative, very oversold, under multiple MA's.  On watch for downgrade.

- Sectors in poor shape (negative technicals in intermediate or long term downtrends (so expect further weakness for a while (bear market))).

None.

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

XBI managed a green day (up 1%).  IBB was down a little more than -1% while everything else was down between -2 and -3%.

Breadth

As you might expect breadth was awful again today, although it was ever so slightly better than Friday.  On NYSE volume was 10.4% positive and issues 20%.  Naz was 30% positive volume, issues 28%.  The numbers were 9.8%, 14%, 29% and 19% on Friday.  But it does mean we've basically had two 90% down volume days on the NYSE in three trading days.   Wow.

And as you might imagine, breadth measures are now very oversold.  % of stocks over 50-DMAs have cratered (and this was coming in to today).

Commodities/Currencies/Bonds

Bonds - After falling across the curve in the morning, yields rose from the lows, but much more on the short end as earlier rate hikes were priced back in and a longer rate cycle was priced out (so longer yields didn't recover much).  2-year yields ended up one basis point at 0.52% but they were down to 0.43% at one point today, 5-year yields ended down four basis points at 1.14%, 10-year yields were down nine to 1.43%, and 30-year yields were down eleven basis points to 1.78% which I believe is the lowest since early January.  The inversion with the 20-year increased to seven basis points.

So as you can see some severe curve flattening today.  At one point, the 5s30s touched 59bps, the flattest since March 2020 (figure below from Heisenberg Report).   

And here's more on the Powell testimony from BBG.  The result is money markets priced 59bps of Fed hikes by the end of next year at one point, up 10bps from Monday. The first full hike remains priced for July.

“It is appropriate, I think, for us to discuss at our next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” said Powell, selected last week by President Joe Biden for another four year term as Fed chief. “In those two weeks we are going to get more data and learn more about the new variant.”

“It now looks like it will take a deterioration in the public health situation over the next two weeks to prevent the FOMC from deciding to quicken the pace of tapering at the next meeting,” JPMorgan Chase & Co. chief U.S. economist Michael Feroli wrote in a note to clients titled “Turbo Tapering on Agenda for Dec. FOMC.”  

The bipartisan support during the hearing for more forceful action on inflation also gave Powell political backing to speed up the taper prior to a vote on his second term as Fed chair.

The comments additionally mark an unusual pivot in his tenure, after the FOMC set the current pace of tapering just a few weeks ago. This suggests rising uncertainty inside the Fed about the “transitory” nature of current prices increases. Indeed, Powell said “it’s a good time to retire that word and try to explain more clearly what we mean.” 

Powell said the word “transitory” was supposed to signal a blip in prices that “won’t leave a permanent mark in the form of higher inflation.” That view was largely based on the idea that inflation resulted from supply disruptions on everything from goods to labor. But scarcities of both are taking longer to resolve, Powell said in both his opening remarks and in response to questions.

“Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate,” he said. “It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year.” 

Powell’s comments mark a rare moment of pre-positioning by a Fed chair which signifies he probably already has broad support on the FOMC to cut back asset purchases.   

Powell, in his opening remarks, said that the recent rise in Covid-19 cases and the emergence of the omicron variant pose “downside risks to employment and economic activity and increased uncertainty for inflation.” But during the following question-and-answer period, the questions -- and his answers -- focused more on the accumulating evidence of elevated prices since officials met Nov. 2-3. 

What Bloomberg Economists Say

“The hawkish tone in Powell’s testimony today, along with the speeches of other FOMC members in the past weeks, signaled a fundamental shift within the committee -- when the Fed’s dual mandate of price stability and maximum employment comes in tension with one another, the central bank will place more weight on the first one.”

-- Anna Wong, chief U.S. economist at Bloomberg Economics.

Dollar (DXY) -  Pared its losses on the Powell testimony but still ended down solidly, breaking its shorter-term uptrend.  Finished at $95.89.  Remains though in intermediate-term uptrend.  Daily technicals mixed.

VIX -  I need to stop making predictions I guess as it did spike back up today, although I still think this spike won't last much longer.  Finished at 27.19.

Crude (/CL) -  After yesterday's meager bounce, resumed its fall today, fueled by Covid concerns, stops getting hit, and likely systematic selling given all the option buying we've noted in the reports.  Made it down to the $65 level which is key and was able to bounce.  I would guess that will mark the bottom of this selloff, but I thought that $10 ago (although that was before the new variant).  Daily technicals are mixed with a very negative MACD but a positive RSI divergence.  At one point it was down 25% from the highs.

As John Kemp updates on positioning noting that it is now back to much more neutral levels with large sales through Wednesday, which doesn't take into account the selling we saw on Friday and today.

LONDON, Nov 30 (Reuters) - Portfolio managers were already selling oil even before news of the Omicron coronavirus variant sent prices into a tailspin on Nov. 26, and the resulting lack of buyers probably worsened the sell off. Hedge funds and other money managers sold the equivalent of 28 million barrels in the six most important petroleum-related futures and options contracts in the week to Nov. 23.

 

Funds sold petroleum in six of the most recent seven weeks, reducing their combined position by a total of 162 million barrels, according to exchange and regulatory data (https://tmsnrt.rs/32MRtuv). The most recent week saw widespread selling in Brent (-10 million barrels), NYMEX and ICE WTI (-3 million), European gas oil (-11 million) and U.S. diesel (-5 million) with small buying only in U.S. gasoline (+1 million).

 

The combined position across all six contracts was cut to 709 million barrels (62nd percentile for all weeks since 2013), down from 871 million barrels (79th percentile) at the start of October. Bullish long positions outnumbered bearish short ones by a ratio of 4.75:1 (62nd percentile) down from 6.76:1 (84th percentile) seven weeks earlier.

 

Even before news of the Omicron variant, bullish positioning had been sapped by the prospect of a release of emergency oil stocks, forecasts of higher U.S. shale output, inflation concerns and profit-taking after a big rally. News about the new variant and restrictions on international passenger aviation therefore arrived in a market already under pressure with an absence of short-term speculative buyers.

 

Omicron news landed into a liquidity hole caused by the pre-existing downward price trend and the fact many traders were still away from the office after the U.S. Thanksgiving holiday the day before.  Lack of liquidity created conditions for a classic flash crash, with adverse fundamental news interacting with market positioning to create an exaggerated downward slump in prices.

 

Brent’s front-month futures contract fell by more than 11% on Nov. 26. The one-day decline was almost five standard deviations away from the mean and the ninth-largest fall out of 8,148 days since the start of 1990.

 

Following fund sales and the price slump, positions are now broadly neutral and prices are close to their long-term inflation-adjusted average, with the likelihood of further price falls or a renewed rise roughly equal.

As OPEC+ continues to lag its scheduled production increases in November according to a RTRS survey.

 LONDON, Nov 30 (Reuters) - The increase in OPEC's oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found on Tuesday, bringing a lack of capacity in some producers into focus ahead of a policy meeting this week.

The Organization of the Petroleum Exporting Countries (OPEC) pumped 27.74 million barrels per day (bpd) in November, the survey found, a rise of 220,000 bpd from the previous month but below the 254,000 increase allowed under the supply deal.

With output undershooting the planned increase, OPEC's compliance with its pledged cuts increased to 120% in November, the survey found, from 118% a month earlier. 

The Reuters survey aims to track supply to the market and is based on shipping data provided by external sources, Refinitiv Eikon flows data, information from tanker trackers such as Petro-Logistics and Kpler, as well as information provided by sources at oil companies, OPEC and consultants.

And crude volatility (OVX) is at the highest levels since April 2020 (although far off those highs).  Still, the same gamma buying goes on in commodities as it does in indexes, so a lot of the unwind of crude is likely related to volatility strategies (and now trend followers) selling.  A big cleanout like this normally results in a big overshoot, but gives a lot of potential upside once those strategies reload.

And Brent backwardation Jan-Jul 2022 has absolutely cratered. John Kemp.

Nat Gas (/NG) - After big losses on some technical factors and a bearish weather forecast yesterday (it was down -11%), it broke an important uptrend line that has been rock solid since April as well as the 100-DMA this morning, and it fell quickly from there ending down -5%.  Did find support at the $4.50 level.  We'll see if that can hold.  Ended at $4.61.  Daily technicals have turned back to negative, and its intermediate term uptrend is in jeopardy.

Gold (/GC) -  Tried to move higher but fell at resistance finishing at $1776 below the uptrend line from last summer.  Daily technicals remain negative.  Could see a deeper selloff now.

Copper (/HG) - Fell back today but unlike oil finished above Friday's levels.  Remains in an intermediate term uptrend.  Daily technicals are neutral. 

U.S. Data

Did reports on September FHFA Housing Price Index and September S&P Case-Shiller Home Price Index and November Consumer Confidence today.  Links below.

S&P and FIFA home prices reports - Prices continue to rise but more evidence we're past the peak in growth - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5669294-s-and-p-and-fifa-home-prices-reports-prices-continue-to-rise-evidence-past-peak-in-growth

US CB Consumer Confidence Nov: 109.5 (est 110.0; prev 113.8; prevR111.6) - November consumer confidence declines although continues to remain well above pandemic lows unlike UofM - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5669265-us-cb-consumer-confidence-nov-109_5-est-110_0-prev-113_8-prevr111_6-november-consumer

Next 24

Data picks up tomorrow.  In the US we'll get the ISM Manufacturing Index for November, Construction Spending for October, the ADP Employment Change report for November, the Fed's Beige Book for December, the weekly MBA Mortgage Applications Index and EIA inventories report, and the final IHS Markit Manufacturing PMI for November. 

Internationally, we'll get manufacturing PMI's, German retail sales, and UK house prices.

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 the ill-timed comments of a certain CEO notwithstanding, I'm not convinced that this variant will be dramatically different from the previous ones, so I'm sticking with a bias to the upside, particularly as we've now wrung out even more of the froth from the market. We know that systematic strategies are derisking now, down to the 64th percentile coming in to today (so probably even lower now), so once we find a bottom they now have room to reengage like we saw in October.  

Of course it could be a bit of a process to find that bottom.  As noted above, sector charts have deteriorated significantly, breadth is awful, it will take some time for the models to "flip", and the market is back to digesting this new more hawkish Fed.  But we're getting fairly oversold, so I'd expect a bounce at least sooner than later.  And tomorrow is the first of the month, which as we noted, has generally been positive.

Misc.

Other random stuff.  

Repos back over $1.5T, remain below $1.65T high water mark.

And some more encouraging words to counteract what was probably a bit of unnecessary (based on current knowledge) fear from Moderna's CEO.  We've had several variants, the vaccines have provided good protection so far, no reason to assume the opposite yet.  WSJ.

BERLIN—The Omicron variant of the coronavirus could lead to more infections among vaccinated people but they will most likely remain protected from a severe course of illness, according to the inventor of one of the first Covid-19 vaccines.

While the new variant might evade the antibodies generated in reaction to the vaccine, the virus will likely remain vulnerable to immune cells that destroy IT once it enters the body, BioNTech SE co-founder Ugur Sahin said.

“Our message is: Don’t freak out, the plan remains the same: Speed up the administration of a third booster shot,” Dr. Sahin said in an interview Tuesday.

Based on current knowledge about the mechanisms behind the vaccine and the biology of variants, Dr. Sahin said he assumed that immunized people would have a high level of protection against severe disease even if infected by the Omicron variant.

“Our belief [that the vaccines work against Omicron] is rooted in science: If a virus achieves immune escape, it achieves it against antibodies, but there is the second level of immune response that protects from severe disease—the T-cells,” he said.

“Even as an escape variant, the virus will hardly be able to completely evade the T-cells.” 

As Israeli statement supports that.

 As does South African data.

And I had missed this, but apparently a study in Qatar noted that protection from a primary (first) infection is pretty good - it prevented hospitalization or death in 90% of reinfections.  Severity of SARS-CoV-2 Reinfections as Compared with Primary Infections | NEJM

Reinfections had 90% lower odds of resulting in hospitalization or death than primary infections. Four reinfections were severe enough to lead to acute care hospitalization. None led to hospitalization in an ICU, and none ended in death. Reinfections were rare and were generally mild, perhaps because of the primed immune system after primary infection.

As Canadian 3Q GDP comes in much better than expected.

Canadian Annualized GDP (Q/Q) Q3: 5.4% (est 3.0%; prev -1.1%; prevR -3.2%)

- GDP (M/M) Q3: 0.1% (est 0.0%; prev 0.4%; prevR -0.8%)

- GDP (Y/Y) Q3: 3.4% (est 3.3%; prev 4.1%)

And more supply chain green shoots.

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.