Neil's Evening Summary – December 23, 2021 - The Christmas Rally Worked, on to Santa

Neil's Evening Summary – December 23, 2021 - The Christmas Rally Worked, on to Santa

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)

Also, on my charts, the lines are 20-DMA (green), 21-DEMA (red), 50-DMA (purple), 100-DMA (blue), 200-DMA (brown)

Source abbreviations: BBG = Bloomberg; WSJ = Wall Street Journal; RTRS = Reuters; SA = Seeking Alpha; HR = Heisenberg Report 

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I have been a broken record this week on my feelings that absent things turning worse with Covid, I was optimistic into year end as lower volatility should mean a reengagement by systematic strategies to go along with the host of positives I have been listing in the "Overall" section each night.  With the news flow continuing to remain optimistic on the Covid front, we did get another day of buying, pushing stocks higher throughout most the day (we did get a little pullback in the last 10 minutes).  The buying was broad based again today with every SPX sector other than RE and utilities closing higher, most for a third day.  At the index level, RUT led today up just under nine tenths of a percent, Naz and NDX finished close behind with the SPX up around six tenths.  It lagged the others but it was enough to give the SPX its 68th all time high this year.

Today continued a streak of the SPX moving more than 0.5% every day but one since Thanksgiving (Bespoke).

Most commodities joined in the party again today, while bonds fell (yields up).

Reminder US markets are closed tomorrow and Europe will have a shortened session (I likely won't bother reporting on it).   

Style box again all green but has been progressively less so each of the last two days.

As Jeff Hirsch provides some background on the "Santa Claus" rally/indicator.

Everyone is anticipating the Santa Claus Rally, but that doesn’t start until next Monday, 12/27. The Santa Claus Rally was defined by Yale Hirsch in 1972 in the Stock Trader’s Almanac as the last five trading days of the year and the first two trading days of the New Year. This short, sweet rally is usually good for about 1.3% on the S&P 500, but the real significance of the SCR is as an indicator.

It is our first seasonal indicator of the year ahead. Years when there was no Santa Claus Rally tended to precede bear markets or times when stocks hit significantly lower prices later in the year. As Yale’s famous line states (2021 Almanac page 116 and 2022 Almanac page 118): “If Santa Claus Should Fail To Call, Bears May Come to Broad and Wall.”

Major Market Technicals

SPX pushed through that 4700 level and made it to an all time closing high (still needs 20 points or so for a new intraday high).  Daily technicals have improved to mixed with a positive MACD but negative divergence on the RSI.  

NDX made it over its trendline and now has a pretty clear pat to the highs.  Daily technicals starting to improve there also.  Naz looks very similar.

And after it finally made it over that downtrend line from the highs (and 20-DMA) yesterday kept going today up to the confluence of the 20, 100 and 200-DMA's.  It is also the 2250 level.  This will be another stiff resistance to get through.  Technicals are positive though.

SPX Sector Flag

Another nice SPX sector flag although a little weaker.  Did have two sectors that were down today (none yesterday) although both were less than a third of a percent in the red.  Did have three sectors up over 1% (same as yesterday).  Discretionary took the top spot on another big day from Tesla but it was a nice mix of sectors that were leaders.  

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.  

Less improvement today but comm's had a very strong week, and I upgraded one notch today.

- Sectors with good/ok technicals, above most resistance.  

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

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

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

XLV - Health care - MACD go long, RSI negative divergence, above all MA's.  

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

XLK - Tech - MACD sell longs, RSI negative divergence, above all MA's. Upgraded today.

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

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

XLC - Communications - MACD cover shorts, RSI positive, under 100, 200, 50 DMAs.  Upgraded today.

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

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

XLF - Financials - MACD cover shorts, RSI positive divergence, under 50-DMAs. On watch for upgrade.

XLI - Industrials - MACD go short, RSI negative, under 50-DMA. On watch for upgrade.

XLE - Energy - MACD go short, RSI neutral, under 20, 50-DMAs.  

- 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 (smaller are more a general "tell" on speculative activity as opposed to health care)), XHB (homebuilders), XRT (retail) 

All green again (second time this week and outside of bios third day in a row) led by transports and semi's both up over 1%.  The others up less than 1%.  

Breadth

Breadth very good today, almost as good as yesterday for NYSE and better for Naz despite less point gains.  That is great to see.  On NYSE volume was 74% positive and issues 64%.  Naz was 72% positive volume, issues 66%.  Yesterday NYSE volume was 75% positive and issues 71%.  Naz was 65% positive volume, issues 59%.  

Commodities/Currencies/Bonds

Bonds - Yields were up with a mild bear steepener.  2-year yields were up three basis points to 0.71% (a post-pandemic high), 5-year yields up two to 1.25% (1.38% is post-pandemic high), 10-year yields were up four to 1.50% (1.76% is post-pandemic high), and 30-year yields up five to 1.91% which remains in the middle of the range of this year (low is 1.64%, high was 2.52%).  The inversion with the 20-year at three basis points (remains below the high of the year of nine).

Dollar (DXY) -  Despite falling beneath the now flat 20-DMA able to hold in finishing little changed.  Finished at $96.04. Remains in intermediate-term uptrend.   Daily technicals negative.   

VIX -  Has continued lower after pushing below 20 yesterday.  Lowest in a month.  Finished at 17.96.

Crude (/CL) -  After getting through heavy resistance yesterday continued higher today, right up to the next level which is the 100-DMA.  Daily technicals positive.  

As the oil market gets increasingly thin as we head into year end. Open interest, the total number of oil contracts held by traders, for crude, gasoline and diesel futures combined is at its lowest in almost six years.

And Marathon takes 250kb under the US exchange program.

And oil rig count moves higher by seven.

 As Iran and Saudi Arabia appear to be mending ties.

Nat Gas (/NG) - After getting over over the 200-DMA for the second time in the last two weeks, it again has not held again falling back finishing down over -6% to the lows of the week.  Now the 20-DMA (green line) is coming in as additional resistance. Finished at $3.73.  Daily technicals positive. 

As storage report came in as expected.

And gas rig count moves up by two.

Gold (/GC) -  Was able to move back above the cluster of resistance today.  Finished at $1810.  Daily technicals remain positive.  

Copper (/HG) - Up again today, and made it over the 50-DMA.  Daily technicals positive.  Could see this quickly run at least to that next line.

Iron Ore - As some see a poor future for this barometer of Chinese growth after a "wild year".  BBG.

Iron ore, a barometer for the Chinese economy and driver of the Australian dollar, is probably having its wildest year ever. Prices jumped to a record above $230 a ton in May, crashed to about $85 in November on a government pledge to reduce steel output, and have now rallied 50% in just six weeks. 

The volatility is set to persist into 2022 as a rebound in steel production this month falters early next year, with the usual seasonal output constraints tightening in the run-up to the Winter Olympics in February. Beyond that, strong headwinds are building: China is pushing ahead with cutting carbon emissions, steel output is expected to contract for a second year, while a debt-laden property sector is weighing on steel consumption and broader growth.

“Iron ore demand will broadly, gradually decline,” said CITIC Futures Co. analyst Zeng Ning. “The property industry is rather weak, steel consumption is likely to contract and more mills will use scrap to reduce emissions.” The brokerage expects China’s steel output to fall by 50 million tons in 2022. 

The country buys about 70% of the world’s seaborne iron ore and is set to produce 1.03 billion tons of steel this year, more than half of global supply.  In terms of what this all means for prices, UBS Group AG expects iron ore to average $85 a ton in 2022, while Citigroup Inc. sees $96. Capital Economics Ltd., meanwhile, predicts $70 by the end of next year. Futures in Singapore have averaged $157 so far in 2021, and traded around $128 on Tuesday. 

The view at Macquarie Group Ltd. is that iron ore could spike in the first half of next year because current steel production levels in China look “unsustainably low.” Output in November slumped to the smallest for the month since 2017. 

For the major mining companies, lower prices mean “reduced --but still fairly large -- margins,” said Gutierrez. Smaller miners may need to consolidate, and projects that have resumed at high iron ore prices will probably have to close, adding to a number of shuttered projects this year. Mining costs can be as low as $15 for a ton of iron ore, compared with prices now of well over $100. 

U.S. Data

Did reports on November Personal Income and Spending and PCE Prices, weekly unemployment claims, November Durable Orders, November New Home Sales, and the final December University of Michigan Consumer Sentiment survey.  Links below.

US Personal Income Nov: 0.4% (Exp 0.4%; Prev 0.5%),Personal Spending Nov: 0.6% (Exp 0.6%; R Prev 1.4%) - Nominal Gains Very Solid, Inflation Adjusted Not So Much - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5678525-us-personal-income-nov-0_4-percent-exp-0_4-percent-prev-0_5-percent-personal-spending-nov-0_6

US Durables Goods Orders Nov P: 2.5% (exp 1.8%; prev -0.4%) - Very solid durable goods report - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5678540-us-durables-goods-orders-nov-p-2_5-percent-exp-1_8-percent-prev-minus-0_4-percent-good

US Univ. Of Michigan Sentiment Dec F: 70.6 (Est 70.4; Prev 70.4) - UofM Consumer Sentiment Improves Slightly But Remains Depressed, Inflation Expectations Tick Down - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5678558-us-univ-of-michigan-sentiment-dec-f-70_6-est-70_4-prev-70_4-uofm-consumer-sentiment-improves

US New Homes Sales Nov: 744K (Est 770K; Prev 745K; prevR 662K) - New Home Sales Come In Under Expectations Due To Huge October Revisions

https://seekingalpha.com/instablog/15085872-cbus-neil/5678633-us-new-homes-sales-nov-744k-est-770k-prev-745k-prevr-662k-new-home-sales-come-in-under

Initial Jobless Claims Week Ending Dec 18th Seasonally Adjusted: Flat At 205K In-Line With Consensus And 205K Prior (Revised From 206K). Non-SA -12K To 254K - Neil's Summary

https://seekingalpha.com/instablog/15085872-cbus-neil/5678565-initial-jobless-claims-week-ending-dec-18th-seasonally-adjusted-flat-205k-in-line-consensus

Next Week

Next week one of the lightest weeks you'll see with basically no earnings reports and just a few data releases.  Home prices will get some attention but otherwise you won't hear much about these.

Overall

I've been a broken record this week on my feelings that as long as the market can continue to look through the Omicron spike I am optimistic due to company and insider buying, sentiment coming off lows, the general "washed out" conditions we saw last week, seasonality, and the likely reengagement of systematic flows that I've talked about every summary this week (assuming volatility remains in line).  

And while sentiment is turning less bearish it remains far from frothy levels.  The put/call ratio was down to 0.82 yesterday (lowest since 11/22) but that's far from the lows we've seen this year.  Same can be said for the NAAIM and AAII surveys which got incrementally more bullish.

And breath was really very good today.  Add that to a notable improvement in technical conditions, and I am very optimistic for that Santa Rally if the news flow can remain to the positive side.

Misc.

Other random stuff.  

Repos continue to edge back from recent record highs (which were near $1.8T).

As, a little surprisingly, Merck's Covid pill was approved for emergency use today.  BBG.

Merck & Co.’s Covid-19 pill was cleared by U.S. regulators, giving high-risk patients another at-home treatment option at a time when the omicron variant is causing cases to surge.

The drug, molnupiravir, received emergency authorization on the heels of Pfizer Inc.’s competing pill that was cleared Wednesday, Paxlovid. Together, the treatments promise to provide a new way to keep a sharp rise in infections from overwhelming U.S. hospitals.

Molnupiravir, developed by Merck with partner Ridgeback Biotherapeutics LP, is intended to treat Covid in nonhospitalized people 18 and older at risk of developing severe illness. A study showed it reduced the risk of hospitalization or death among adults with mild to moderate disease by 30%. 

Molnupiravir works by introducing errors in genetic material to ultimately stop the virus’s replication, but it may affect growing human cells. The FDA said that pregnant people be advised of potential risks to the fetus before receiving the drug. In November, a panel of outside advisers to the FDA debated whether the drug was safe for wide use. Some expressed concern that it could lead to mutations in the virus that might make it more dangerous or transmissible, or that it could pose risks for pregnant people, and that its low efficacy in the clinical trial meant its risks outweighed its benefits. Ultimately, a divided panel voted to back the treatment by a narrow margin.

Government officials have said they expect to have 400,000 courses of Merck’s treatment available initially, and expect to get 3 million courses -- the U.S. government’s entire order -- by the end of January. 

And I've posted similar charts but Jurrien Timmer with chart of SPX during Fed rate hikes. 

And he also notes smartly that despite record buybacks, on a % of market cap basis it isn't so amazing.

As hotel occupancy is 8% higher this week than the same week in 2019 despite Omicron.

And Russian President Putin sounded more optimistic about the Ukraine situation today.  BBG.

Russian President Vladimir Putin praised what he described as a “positive” U.S. response to the Kremlin’s demands for legally binding security guarantees to defuse a stand-off over Ukraine and said talks between the two countries are to start in January.  The U.S. has said it’s ready to hold talks starting in January on two draft security treaties that Russia published last week, though it’s called some of the Kremlin’s proposals unacceptable

“On the whole, we see a positive response,” Putin said at his annual press conference on Thursday. “Our American partners say they’re ready to start discussions early next year in Geneva. Both sides have named representatives and I hope that things will continue along the same path.” 

Putin made no mention of the threat of military action as he did earlier this week but said the Kremlin will do what it needs to ensure Russia’s security. He hit out against the successive waves of North Atlantic Treaty Organization expansion up to Russia’s borders. “Do we put our missiles close to U.S. borders?” he asked. “No! It’s the U.S. which has come to our house with its missiles, they’re on our doorstep already!”

Putin’s press conference, which lasted almost four hours and was attended by 500 journalists, covered topics from inflation and incomes to Santa Claus and rail service. 

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.