Neil's Evening Summary – December 27, 2021 - Santa Looking Good So Far

 Neil's Evening Summary – December 27, 2021 - Santa Looking Good So Far

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 

__________________________________________________________________

Please note I'm working through issues with Seeking Alpha (and might very well move over to Substack), so I'll be posting on the old blog for this week.  Sorry for any inconvenience.  If anyone has any thoughts on this subject, I'm definitely not an expert on what to do with the blog, so leave them in the comments section.

So, as I noted on Friday, "I have been a broken record 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."  As with Thursday and Friday, the news flow continued to remain optimistic on the Covid front (despite skyrocketing cases), and so the buying continued for a fourth day, pushing stocks higher throughout the day, closing near the highs.  Big gains were seen in market favorites like  Apple (AAPL 180.33, +4.05, +2.3%), Microsoft (MSFT 342.45, +7.76, +2.3%), Meta Platforms (FB 346.18, +10.94, +3.3%), Tesla (TSLA 1093.94, +26.94, +2.5%), and NVIDIA (NVDA 309.45, +13.05, +4.4%).

At the index level, NDX led today up +1.59%, Naz and SPX two tenths behind, and RUT "lagged" up nine tenths of a percent.  SPX hit its 69th all time closing high this year.

Today also 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 bond yields "twisted" with shorter yields moving higher while longer fell.

Style box again all green and a little all over the place in terms of leadership.

And I think I've noted this before, but while we had over $1T in inflows to US equity funds in 2021, it is just recovering a bit of the huge outflows since 2015 (blue line at the bottom).  And “[f]or over a decade prior [to 2015], cumulative inflows into equity funds were essentially zero,” Deutsche Bank’s Parag Thatte and Binky Chadha noted over the weekend.  So while there's been a lot of buying, we're not even close to back to even in terms of cumulative flows into US stocks since 2015.

And as Heisenberg Report notes (citing the referenced note), $1T doesn't buy what it used to.

And from this morning (from me) in case you missed it:

I'm not one for making a lot of forecasts/predictions for how the upcoming year will go.  I do believe in having longer and intermediate term views that guide your decision making process, but they should be constantly evolving, and anyone trying to guess how 2022 will actually turn out at this point is doing just that, guessing (I'd love to see the piece from Dec 2020 that predicted 68 new all-time highs for the SPX to go along with a 1.5% 10-year, CPI at nearly 7%, a newly hawkish Fed, and the year ending at the highs despite a vaccine-evading Covid variant that had cases hitting new records globally).

That said, I'll try to intersperse some nuggets about what people are saying.  Sam Stovall was on BBG last week and noted, first that after a 20%+ year the average return is 10.4% the following year.  So that's a positive.  But he also noted that the third year of a bull market is generally one of the weakest with low single digit returns on average.  Similarly, the second year of a Presidential cycle is generally not great and comes with it an increase in volatility of 40%.  I'm hoping that isn't what we see, but with the Fed also starting a rate hike cycle, I wouldn't be shocked to see elevated volatility next year.

As Tom Lee sees the rally continuing into January but thinks it could get rocky from there.  SA.

High-profile analyst Thomas Lee predicted that the recent rise in stock prices, which has taken the S&P 500 to within striking distance of his aggressive year-end target, still has room to run as Wall Street heads into 2022, with the S&P 500 potentially hitting 5,000 in early January.  However, the Fundstrat Global Advisors research chief told CNBC that 2022 represents a "treacherous" year, given the likelihood that the Federal Reserve will start to raise rates.

"If we are at 5,000 in January, we could be down by June from there," he said.

Looking longer-term, however, Lee still sees the U.S. stock market as a good investment. He acknowledged that P/E growth in the S&P 500 would likely slow in the coming years, but an acceleration in earnings growth, in part fueled by inflation, could drive stocks further. "I think it's possible that we could compound the S&P at 20% in the next 10 years," he said.

Lee began calling for a 4,800 year-end target for the S&P 500 back in October. At the time, this represented a rally of more than 7%. In Monday's midday trading, the S&P 500 topped 4,776, leaving it less than a percent shy of Lee's prediction. A rally from current levels to 5,000 would represent an advance of about 4.7%.

In explaining why he sees further upside in early January, Lee argued that a "panic" in response to the emergence of Omicron sent stocks tumbling late last month, causing traders to position themselves "as if the market was crashing." Meanwhile, Lee's model shows cases of the new COVID strain reaching a peak in early January, suggesting that stocks have already reached a near-term bottom. "I think the rally we're seeing has a lot of fuel," he said of the current market upswing. "I don't think the rally in the past five days has put much cash to work."

Major Market Technicals

SPX shot up to a conclusive new all time high today.  Other than an RSI divergence (it's lower than it was at the prior high) daily technicals are in good shape.  

NDX and Naz have similar charts and setups to SPX except they are not quite to new highs.  Naz is below.  

And RUT keeps pushing through resistance levels.  Today it barely poked through its 200-DMA (right on the 100).  It has the 50-DMA next.  Technicals are positive.

SPX Sector Flag

And the run of nice looking SPX sector flags continued for a fourth day as well.  Every sector green and up at least around a half percent.  Very solid.  Six sectors up at least 1% and two up over 2%.  Top three were a cyclical, a tech, and a defensive.  Hard to complain about.  

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.  

Lots of upgrades.  Every sector chart showed notable improvement.  Lots to like here today.

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

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

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, overbought, above all MA's.  ATH.

XLK - Tech - MACD go long, RSI negative divergence, above all MA's. Upgraded today. ATH.

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

XLI - Industrials - MACD go long, RSI positive, under 50-DMA. Double upgrade today. 

XLY - Discretionary - MACD go long, RSI negative, above all MA's. Double upgrade today. 

- 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 positive, under 100, 200, 50 DMAs.  Upgraded today.

XLF - Financials - MACD cover shorts, RSI positive, under 50-DMA. Upgraded today.

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

XLE - Energy - MACD go short, RSI neutral, under 20, 50-DMAs.  On watch for upgrade.

- 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) 

Bios pulled back after a good week last week with XBI down over -2% and IBB down eight tenths of a percent.  Otherwise all green with semi's leading up almost 3%.  Homebuilders and retail were up over 1%. Transp was up nine tenths.

Breadth

Here's where it gets disappointing.  After three excellent days in a row, breadth tailed off today particularly on the Naz.  On NYSE volume was 66% positive and issues 65%.  Naz was just 54% positive volume, issues 50%.  Both of those are worse than Wednesday and Thursday of last week despite a higher point gain today.  At just over 50% with over 1% gains, the Naz is really underwhelming.  

But on the NYSE at least we finally have the McClellan Summation Index (often described as "what the average stock is doing) moving back up.  

Commodities/Currencies/Bonds

Bonds - Bond yields "twisted" flattening the curve pivoting around the 5-year, with shorter yields moving higher while longer fell.  2-year yields were up five basis points to 0.76% (a post-pandemic high), 5-year yields up one to 1.26% (1.38% is post-pandemic high), 10-year yields were down two to 1.48% (1.76% is post-pandemic high), and 30-year yields down three to 1.88% 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 four basis points (remains below the high of the year of nine).

As BBG says bond yields could remain "restrained" due to the global glut of savings and the fact that bond bears are already close to "all in" with the largest net short in Treasuries since January.

Anyone gearing up for bond yields to surge in 2022 should think again. A global glut of saved cash has the potential to restrain an increase in rates, even as central banks dial back their pandemic stimulus. 

The strength of demand for bonds even in the face of deeply negative real returns underpins the broad consensus that 2% may act as a ceiling for U.S. 10-year yields in the coming year. Hedge funds have built up the biggest short positions in 11 months with rates expected to climb in 2022 thanks to both inflation and expectations that the Federal Reserve will respond. But strategists expect the advance to be gradual and top out in negative territory on an inflation-adjusted basis.

Fed Chair Jerome Powell highlighted the role of deep-pocketed foreign investors in repressing longer-dated yields just after this month’s final policy meeting for 2021. The way that dynamic is expected to keep anchoring yields helps explain why U.S. policy makers mostly seem relaxed about flattening yield curves, rather than fretting over whether they signal that aggressive rate hikes could kill off economic growth.

 “Deep pools of savings in Europe, Japan and north Asia broadly are going to continue to underpin demand for bonds, hence the persistence of negative and ultra-low yields,” said Martin Whetton, head of fixed-income and foreign-exchange strategy at Commonwealth Bank of Australia, the nation’s largest lender. “These investors will always be attracted to positive yields, be they outright or FX-hedged, and so we expect 10-year Treasuries will find demand around the 2% mark.”

The weighted average forecast in a Bloomberg survey of strategists is for Treasury 10-year yields to rise a bit more than 60 basis points to just above 2% by the end of 2022. Yields on German 10-year bunds are seen climbing about 50 basis points to 0.08%, and similar-maturity Japanese bonds are projected to edge less than 10 basis points higher to 0.13%. Inflation in both Japan and Germany is expected to be much slower than what’s forecast for the U.S. next year.  

Dollar (DXY) -  Continues to hold in despite really poor technicals.  Remains just below the now flat 20-DMA.  Finished at $96.07. Remains in intermediate-term uptrend.   Daily technicals negative.   

VIX -  After starting higher in the morning fell to the lowest close in over a month.  Finished at 17.68.

Crude (/CL) -  After starting lower in the morning, surprised me shooting higher by almost 3% on no real news.  Guess I'll chalk it up to thin markets.  But it went right through the 100-DMA it was struggling with to just under the 50-DMA.  Finished at $75.94 WTI.  Daily technicals positive.  

As a lot more of us hit the road this year than last.

Nat Gas (/NG) - Also moved strongly higher today up over 8%, and closing above the 200-DMA for the first time since the beginning of the month.  Also made it over the 20-DMA (green line). Finished at $4.05.  Daily technicals positive. If it can build on this momentum it has a lot of room to run.

Gold (/GC) -  Was able to move a little further above the cluster of resistance today.  Finished at $1813.  Daily technicals remain positive.  

Copper (/HG) - I said on Thursday "Could see this quickly run at least to that next line", and it did exactly that, moving higher for a fifth day up to that resistance level.  It hasn't closed above that level since October.  Daily technicals positive.

U.S. Data

No reports today.

Next 24

In the US we'll get the two big house price surveys tomorrow - FHFA Housing Price Index for October and the S&P Case-Shiller Home Price Index for October.  We'll also get some regional Fed reports (Richmond Fed manufacturing and services and Dallas Fed services).  I'll report on the results and post the tables and charts in the summary, but I think I'm going to stop doing full reports on regional Fed surveys.  They take as much time as bigger reports but I don't think are as valuable. 

Overseas, highlight is Japanese November industrial production and unemployment.

Overall

So not much more to say that I haven't said over and over the last couple of weeks.  I continue to feel that as long as the market can 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 two weeks ago, seasonality, and the likely reengagement of systematic flows that I think played an outsized role today.  And you can add to that a big improvement in both index and sector charts.

My big quibble today is breadth.  That said, it's one day, and NYSE was ok.  Breadth is the kind of thing that doesn't cause things to fall apart on its own, and I don't see anything that should make it matter right now.  Plus, again, it was just one day.  So I remain very optimistic for the Santa Rally to continue if the news flow can remain to the positive side.

Misc.

Other random stuff.  

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

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.