Neil's Evening Summary – December 29, 2021 - Stocks Remain On Ice For A Second Day

Neil's Evening Summary – December 29, 2021 - Stocks Remain On Ice For A Second Day

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 Monday - "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 yesterday that continued into today.  Volumes were very light (around half of the 20-day moving average).  At the index level, SPX and RUT were up around a tenth of a percent, the Naz was down around that much, and the NDX was flat. But it was nevertheless enough for a new closing for the SPX, its 70th of the year (second most ever).

Commodities were mixed, while longer bond yields moved higher steepening the yield curve.

Style box shows the muted gains.

And I noted earlier this week that the 2nd year of a Presidential cycle is normally weak (as is the 4th year).  Here's more on that from Argus.

Of the four years in a presidential term, the second year (the mid-term election year) has been one the worst for investors. Since 1980, returns in the second year of a presidential term have averaged 5.6%, compared to average returns of 14.4% and 15.8%, respectively, in years 1 and 3. Why? The likely reason is uncertainty. Investors favor continuity, and a mid-term election offers a real opportunity for a change in direction, whether its fiscal policy, antitrust philosophy, or a certain regulatory focus. We note that incumbent parties typically lose seats in mid-term elections, and even the loss of a few Democratic seats in either the Senate or the House could tip the chamber to the Republicans. Currently, President Biden’s approval rating is low. According to the latest CNN/SSRS poll, President Biden has a net negative approval rating of -9 points on the economy, which is lower than the -4 point ratings for both President Obama and President Trump. The odds for a Republican controlled House are currently 5-1. But a lot can happen over the next 12 months.

And this chart from CXO indicates a similar pattern although it seems that Presidential election years are better than the Argus chart.

Either way, it looks like we can expect gains during the first half of next year to be muted if this is any indicator.

Major Market Technicals

Not much change on the charts for SPX, NDX, and Naz again today.  SPX below.  They all look similar except NDX and Naz are not at record highs (but are close).

RUT remains under 200-DMA which is now setting up as "real" resistance.  Technicals are positive.

SPX Sector Flag

SPX sector flag similar to yesterday but one more green sector, so seven today, with again none up more than 1%.  Defensives took the top three spots (they were the top two yesterday).   No sector down more than two-thirds of a percent.

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 with a focus on resistance levels, MACD, and RSI.  I do often buy calls though when I upgrade a sector.  Going to keep playing with the groupings so bear with me.  Changes are in bold.  

Not much change again today.  Defensives continue to lead.

- 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. ATH.

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. 

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

XLI - Industrials - MACD go long, RSI positive, above all MA's. 

XLY - Discretionary - MACD go long, RSI positive 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 positive, under 50, 100, 200-DMAs.  

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

XLE - Energy - MACD cover shorts, RSI neutral, under 50-DMA.  

- 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) 

None moved more than 1%.  Homebuilders were close up nine tenths.  Otherwise, transportation, retail, and IBB were green, semi's and XBI were red.

Breadth

Breadth disappointing again today.  On NYSE volume was 41% positive and issues 53%.  Naz was just 39% positive volume, issues 36%.    

Commodities/Currencies/Bonds

Bonds - Some decent curve steepening today.  2-year yields were up one basis points to 0.75% (0.76% is post-pandemic closing high), 5-year yields up two to 1.29% (1.38% is post-pandemic high), 10-year yields were up six to 1.47% (1.76% is post-pandemic high), and 30-year yields up six to 1.96% 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).

This puts the 10-year yield back to the middle of its wedge pattern.

Dollar (DXY) -  I've noted the deteriorating technical condition for a few days, and it finally gave way today, with the dollar falling to lowest level since the turn of the month.  Finished at $95.90. Remains in intermediate-term uptrend.   Daily technicals negative.   Further downside action seems the easiest path.

VIX -  Continued to push a little lower for a fifth day.  Finished at 16.95.  Lowest in over a month.

Crude (/CL) -  Spent the day testing the 50-DMA again, and while it again did get over it, it also again fell back by the close to just under.  Finished at $76.59 WTI.  Daily technicals positive. 

Got some support from the EIA report today which showed a huge -20mb draw across the petroleum complex.  Link to that report below in US data.

We also got the Dallas Fed's 4Q energy market survey.  Not much unexpected.  The one thing that's not below that I noted was that the "company outlooks" were healthy for both E&P and servicers but the latter improved q/q while the former pulled back (from very high levels).  Here was the summary (highlights are mine):

The oil and gas sector continued growing in fourth quarter 2021, according to oil and gas executives responding to the Dallas Fed Energy Survey. The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained elevated at 42.6, essentially unchanged from its third-quarter reading.

Oil production increased at a faster pace, according to executives at exploration and production (E&P) firms. The oil production index moved up from 10.7 in the third quarter to 19.1 in the fourth quarter. Similarly, the natural gas production index advanced seven points to 26.1.

Costs rose sharply for a third straight quarter. Among oilfield services firms, the index for input costs increased from 60.8 to 69.8—a record high and suggestive of significant cost pressures. Only one of the 44 responding oilfield services firms reported lower input costs this quarter. Among E&P firms, the index for finding and development costs advanced from 33.0 in the third quarter to 44.9 in the fourth. Additionally, the index for lease operating expenses also increased, from 29.4 to 42.0. Both of these indexes reached their highest readings in the survey’s five-year history.

Oilfield services firms reported improvement across all indicators, although the pace of growth for some indicators has slowed. The equipment utilization index edged up from 47.8 in the third quarter to 51.1 in the fourth. The operating margin index remained positive but declined from 21.8 to 11.6. The index of prices received for services also remained positive but fell from 42.2 to 30.3.

Labor market indicators showed further growth in the fourth quarter. The aggregate employment index posted a fourth consecutive positive reading, though it edged down from 14.0 to 11.9. Employment growth continued to be driven primarily by oilfield services firms; the employment index was 22.7 for services firms versus 6.7 for E&P firms. The aggregate employee hours index was largely unchanged at 18.0. The aggregate wages and benefits index moved higher, from 30.3 to 36.6—a record high.

Six-month outlooks improved, with the index remaining positive but declining from 58.9 last quarter to 53.2 in the fourth quarter. The outlook uncertainty index fell to -1.5, with the near-zero reading indicating that uncertainty is relatively unchanged compared with the prior quarter.

On average, respondents expect a West Texas Intermediate (WTI) oil price of $75 per barrel by year-end 2022; responses ranged from $50 to $125 per barrel. Survey participants expect Henry Hub natural gas prices of $4.06 per million British thermal units (MMBtu) at year-end 2022. For reference, WTI spot prices averaged $71 per barrel during the survey collection period, and Henry Hub spot prices averaged $3.76 per MMBtu.

Most executives expect their firm’s capital spending to rise in 2022 compared with 2021. Forty-four percent of executives said they expect capital spending to increase slightly, while an additional 31 percent anticipate a significant increase. Sixteen percent expect spending in 2022 to remain close to 2021 levels. Only 8 percent expect reductions in spending in 2022.

And while we've heard a lot about restraint, many E&P firms are looking to grow production next year.

Finally, I didn't see this comment, but BBG noted that capital availability remains an issue.

“The political pressure forcing available capital away from the energy industry is a problem for everyone,” an unidentified survey respondent said. “Banks view lending to the energy industry as having a ‘political risk.’ The capital availability has moved down-market to family offices, etc., and it is drastically reducing the size and availability of commitments regardless of commodity prices.”

Nat Gas (/NG) - Just when it seemed ready to break higher, does the opposite, falling back down below the 20 and 200-DMAs. Finished at $3.84.  Daily technicals positive. 

Gold (/GC) -  After sinking down into that cluster of resistance, was able to pull itself back just above.  Finished at $1805.  Daily technicals remain positive.  

Copper (/HG) - After failing again yesterday at the November highs, pulled back to the 50-DMA today where it bounced but still finished in the red.  Daily technicals remain positive.

U.S. Data

Did reports on Pending Home Sales for November, the weekly EIA inventory report, and the Advance November reports for Intl Trade in Goods, Retail Inventories, and Wholesale Inventories.  Links below.

DoE Crude Oil Inv (W/W) 24-Dec: -3576K (est -3233K; prev -4715K) - Massive -20mb draw across the petroleum complex (almost -50mb last three weeks) 

https://sethiassociates.blogspot.com/2021/12/us-doe-crude-oil-inv-ww-24-dec-3576k.html

US Advanced Goods Trade Balance Nov: -97.8B (est -$89.0B; prev -$83.2B) - Exports fall, imports increase, auto inventories grow for the first time in months 

https://sethiassociates.blogspot.com/2021/12/us-advanced-goods-trade-balance-nov.html

US Pending Home Sales (M/M) Nov: -2.2% (est 0.5%; prev 7.5%) - Pending home sales slip after huge October 

https://sethiassociates.blogspot.com/2021/12/us-pending-home-sales-mm-nov-22-est-05.html

And yesterday we got the December Richmond Fed manufacturing report which showed some improvement from November.  Charts, table and commentary below.

Fifth District manufacturing activity strengthened in December, according to the most recent survey from the Federal Reserve Bank of Richmond. The composite index rose from 12 in November to 16 in December, driven by increases in shipments and new orders. The third component in the composite index, employment, moderated but remained in expansionary territory. Backlogs of new orders registered their second highest index value on record, as vendor lead times remained high and inventories remained low. Meanwhile, manufacturers reported continued investment spending. More manufacturing firms reported increasing employment than decreasing in December. Respondents continued to report difficulty finding workers with the necessary skills and are expecting this difficulty to continue. Many firms increased wages in December and are planning to keep increasing wages. Our expected wage index reached a record high of 74 in December. The average growth rate of prices paid and prices received by survey participants increased in December. Firms expect the growth rate of prices paid and prices received to slow over the next year.

Next 24

In the US lighter day with just the weekly jobless claims report.  

Overseas, we'll get some data from S Korea and Spain as well as EU Core CPI for November.

Overall

Nothing much 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 this week has been breadth and it continued today.  But 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.  That said, we're starting to see sentiment turn more optimistic judging by the put/call ratio so the chances for a pullback (next week?) are starting to rise.

Misc.

Other random stuff.  

Repos remain above $1.6T but well below the record highs of last week (which were near $1.8T).

As Putin and Biden will talk tomorrow.  BBG.

President Joe Biden plans to talk by phone with Russian President Vladimir Putin on Thursday as the U.S. and its allies raise alarm about Russia’s troop buildup on the Ukraine border.

The leaders will “discuss a range of topics, including upcoming diplomatic engagements with Russia,” National Security Council spokeswoman Emily Horne said in a statement. 

Thursday’s call was requested by Russia, according to the U.S. official, who deferred to the Russians on the reason for the request. The U.S. official said a successful conversation can only take place if there’s de-escalation at the Ukraine border. But Biden agreed to take part because because he believes in leader-to-leader diplomacy and that the situation demands discussions between the two presidents, the official said.  The call is scheduled at 3:30 p.m. Washington time, said another American official. 

And shoppers flocked to off-price retailers this holiday season.  BBG.

Americans flocked to off-price retailers during the holiday period, with visits rising above pre-pandemic levels, according to new data. 

Foot traffic at T.J. Maxx and Marshalls, both owned by TJX Cos., rose 14.7% and 16.2%, respectively, from Dec. 1 to Christmas Day compared with a year earlier, data from analytics firm Placer.ai show. Burlington Stores Inc.’s foot traffic increased 17.5%, while Ross Stores Inc.’s rose 22.2% during the same period. Nordstrom Rack’s 39.8% traffic jump was the largest increase among discount retailers that Placer.ai analyzed. The company uses mobile-phone data to determine store visits.  

Additionally, traffic at T.J. Maxx, Marshalls, Burlington, Ross and HomeGoods Inc. all rose at least 4.9% compared with two years ago. HomeGoods saw the biggest two-year jump at 14.7%. Nordstrom Rack was the only off-price retailer that saw a decline in foot traffic over the two-year period. The overall performance of off-price stores contrasts with department-store chains like Neiman Marcus, Macy’s Inc. and Kohl’s Corp., where foot traffic declined this year compared to 2019, according to Placer.ai. 

In 2022, off-price retailers are poised to gain more ground, said Liza Amlani, principal and founder of the Retail Strategy Group. The ongoing supply-chain logjam may have sparked larger orders from big retailers of apparel, shoes and other items that didn’t arrive in time for the holidays -- which means the merchandise may be sold off to discount chains in the coming weeks. 

As weather adds to the airline woes this week.  WSJ.

U.S. airlines continued to struggle with weather and Covid-19-driven staffing issues on Wednesday, with unusually strong jet-stream winds affecting transcontinental flights.

Travelers faced a potential fifth consecutive day of more than 1,000 flight cancellations as snow in the Pacific Northwest and across the Midwest clogged airports, and headwinds forced one jet to divert to refuel.

Seattle-based Alaska Air Group Inc. ALK -1.44% took the unusual step late Tuesday of asking fliers to postpone nonessential travel until the new year, scrubbing a fifth of the flights from its hometown hub over the next two days to build in time to deice aircraft.

The airline said more snow was expected in the Pacific Northwest, and that passengers hit by cancellations could face a wait of three days or more for an alternative flight.

U.S. cancellations climbed to around 900 by midafternoon Wednesday, according to tracking service FlightAware, with more than 400 already slated for Thursday. That compares with almost 1,300 cancellations on Tuesday.

Airlines said the inclement weather has had a bigger impact in recent days than the staffing shortages that elevated cancellation rates last week, when more pilots, flight attendants and other personnel were affected by Covid-19.  The FAA said the jet stream was stronger than usual, with winds upward of 170 knots—almost 200 miles an hour—over the Great Lakes. The agency said it regulated departures to avoid congestion and prevent planes speeded or slowed by the jet stream from arriving too close together at airports.

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.