Neil's Evening Summary – December 28, 2021 - Santa Takes A Breather

 Neil's Evening Summary – December 28, 2021 - Santa Takes A Breather

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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Repeat from yesterday - "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."

After a furious four-day rally that saw the SPX gain almost 5% and the Naz and RUT nearly 6%, indexes took a well-deserved breather today reversing from early gains to finish with mild losses on weakness in growthier shares.  At the index level, SPX was least red at just under unchanged, while NDX, Naz, and RUT were all down between a half and two thirds of a percent.  

Today was only the second day since Thanksgiving that the SPX didn't move at least +-0.5% (Bespoke).

Commodities were mixed, while bond yields were little changed.

Style box shows the weakness in growth.

As Goldman notes that with the Child Tax Credit currently expired, it just adds to the withdrawal of fiscal support that they say will be a bigger drag on growth in 2022 than most are expecting.  “The deceleration is likely to be sharpest in Q1, when the Omicron variant will likely weigh on service sector spending and labor supply, and it may also worsen global supply chain disruptions,” the authors said. “For 2022 as a whole, the main headwind is the large fiscal pullback.”

And they note when it comes to consumer spending that “[w]e still see room for consumers to supplement their incomes by drawing on a larger share of their excess savings accumulated during the pandemic as well as wealth gains from increases in home and equity prices.” However, there are countervailing forces at work as while “the bulk of the excess savings still sit in bank deposit accounts, arguing for a high spend-out rate ... they are held mainly by the upper quintiles of the income distribution, arguing for a lower spend-out rate.”

Major Market Technicals

Not much change on the charts today for SPX, NDX, and Naz from yesterday.  SPX below.

RUT did get almost to its 50-DMA but then fell back and broke under the 100 and 200-DMAs.  So it's got more resistance.  Technicals are more positive though.

SPX Sector Flag

Weaker SPX sector flag as might be expected but still had six of eleven sectors green, although none up more than 1%.  Defensives took the top two spots.    

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 much change.  I'd say more improvement than deterioration.  Energy upgraded, so now no sectors in the bottom two slots.

- 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.  

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

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

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

XLY - Discretionary - MACD go long, RSI negative, 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 positive, under 100, 200-DMAs.  

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

XLE - Energy - MACD go long, RSI neutral, under 50-DMA.  Upgraded today.

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

- 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 down again today joined by semi's which I missed hit an ATH yesterday.  Retail also finished in the red as homebuilders and transports had mild gains. Transport chart looks solid.

Breadth

Breadth disappointing again today particularly Naz which was notably weak yesterday as well.  On NYSE volume was 41% positive and issues 46%.  Naz was just 31% positive volume, issues 33%.    

Commodities/Currencies/Bonds

Bonds - Bond yields little changed.  2-year yields were down two basis points to 0.74% (from a post-pandemic high), 5-year yields up one to 1.27% (1.38% is post-pandemic high), 10-year yields were up one to 1.49% (1.76% is post-pandemic high), and 30-year yields up two to 1.90% 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 junk bonds have rallied almost 2% in December along with equities.  BBG.

U.S. junk bonds have returned almost 2% in December, beating most other parts of the fixed income market and paving the way for borrowers to raise more debt fast out of the gates in 2022.

The risky debt has gained about 1.9% in December, the biggest monthly return in more than a year, according to Bloomberg index data, after experiencing one of the worst months since the pandemic started in November. U.S. investment-grade bonds have fared less well, down 0.16% over the same time.

Junk-bond yields, meanwhile, have rallied by more than 40 basis points in the past week or so and are on track to fall below 4%, levels not seen since September, if they keep dropping at this pace. A slow down in new bond sales has been one of the factors behind the rally, along with inflows to funds that buy the debt.

There hasn’t been a new issue since mid-December, and that limited activity is forcing investors that are looking to add risk to buy bonds in the secondary market, said Nichole Hammond, senior portfolio manager at Angel Oak Capital Advisors LLC.

Dollar (DXY) -  Continues to hold in despite really poor technicals.  Remains just below the now tilted down 20-DMA.  Finished at $96.15. Remains in intermediate-term uptrend.   Daily technicals negative.   

VIX -  Continues to push a little lower for a fourth day.  Finished at 17.54.

Crude (/CL) -  Spent the day testing the 50-DMA.  It did get over but fell back by the close.  Finished at $76.05 WTI.  Daily technicals positive.  

As API shows another crude draw this week: Crude -3.2M, gasoline +600K, distillate -200K.

Nat Gas (/NG) - Finished down but remained above the 20 and 200-DMAs. Finished at $4.05.  Daily technicals positive. 

Gold (/GC) -  Started strong in the morning but gave it all back to finish mildly red.  Remained above the cluster of resistance.  Finished at $1806.  Daily technicals remain positive.  

Copper (/HG) - Capped again today by the resistance from the November highs finishing in the red.  Daily technicals positive.

U.S. Data

Did report on FHFA Housing Price Index for October and the S&P Case-Shiller Home Price Index for October.  Link below.

HPI Composite: - 20 City (S.A.) +0.9% M/M vs. +1.0% consensus, +1.0% prior; US FHFA House Price Index (M/M) Oct: 1.1% (prev 0.9%) - Home prices remain hot but under peak levels

https://sethiassociates.blogspot.com/2021/12/hpi-composite-20-city-sa-09-mm-vs-10.html

Next 24

In the US we'll get Pending Home Sales for November, the weekly MBA Mortgage Applications Index and EIA inventory report, and the Advance November reports for Intl Trade in Goods, Retail Inventories, and Wholesale Inventories.

Overseas, no really notable data.

Overall

So not much more to add to yesterday.  "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.  And you can add to that a big improvement in both index and sector charts."

My big quibble yesterday was breadth and it continued today.  Particularly on the Nasdaq.  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, but if it continues to be weak it will just need something to "tip it over".  So for now 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 move back above $1.6T but remain well below the record highs of last week (which were near $1.8T).

As hospitalizations continue to lag behind what we've seen in prior waves, but they are still substantial.  BBG.

The omicron-fueled U.S. surge in Covid-19 cases appears to be triggering a lower rate of hospitalizations than earlier waves, more evidence that the highly transmissible variant leads to milder symptoms than other strains. 

The seven-day average of new cases hit 206,577 on Sunday, roughly 18% lower than the all-time high recorded on Jan. 11, according to data from the Centers for Disease Control and Prevention. Meanwhile, hospitalizations rose to a seven-day average of 8,964, only half their earlier peak recorded in January. 

Because the new variant spreads so easily, the U.S. will likely see continued increases in hospitalizations and deaths, though not as severe as during the delta wave that hit mid-year, said Albert Ko, chair of the department of epidemiology and microbial diseases at the Yale School of Public Health. 

“We are seeing exponential increases in cases, and a much lower increase in hospitalizations and deaths,” Ko said in a phone interview. “But we still have 65,000 people who are currently hospitalized because of Covid, and we are having already 1,500 deaths a day.”

As the number of "zombie companies" fell by 13% this year.  BBG.

In a year when many companies faced severe headwinds from higher inflation, supply chain woes and fresh Covid waves, the ranks of so-called zombie companies -- those that aren’t earning enough to cover their interest payments -- actually declined.

In the Russell 3000 Index, a broad benchmark of U.S. stocks, there were 656 companies that didn’t generate sufficient profit in the past four quarters to cover their interest expenses as of December 27. That’s down from 756 companies at the start of the year -- a drop of 13%. 

Smaller firms have been able to successfully navigate the dual threats of price pressures and virus spikes so far, according to Dan Brown, senior credit analyst at Russell Investments Group. And the massive amounts of federal stimulus during the pandemic, including Paycheck Protection Program loans, certainly helped to keep those businesses afloat, he said. 

“The support programs that were initially rolled out during the first wave of Covid have generally been supportive, particularly the PPP loans to companies of all sizes, i.e. the forgivable loans,” Brown said. “Those, in effect, allowed companies to increase large cash cushions that we have seen persist.”

And Apple splashes the cash (err, stock).  BBG.

Apple Inc. has issued unusual and significant stock bonuses to some engineers in an effort to retain talent, looking to stave off defections to tech rivals such as Facebook owner Meta Platforms Inc.

Last week, the company informed some engineers in silicon design, hardware, and select software and operations groups of the out-of-cycle bonuses, which are being issued as restricted stock units, according to people with knowledge of the matter. The shares vest over four years, providing an incentive to stay at the iPhone maker.

The bonuses, which came as a surprise to those who received them, have ranged from about $50,000 to as much as $180,000 in some cases. Many of the engineers received amounts of roughly $80,000, $100,000 or $120,000 in shares, said the people, who asked not to be identified because the program isn’t public. The perk was presented by managers as a reward for high performers.

To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to https://sethiassociates.blogspot.com for the full history.