Trading | April 9, 2021

Weekly Trader’s Outlook

Equities march undaunted, further and further into record territory.

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Weekly Market Review:

Earnings Summary

The regular Q1 earnings season has not yet begun. However, not all companies follow a regular calendar year. With 19 (4%) of the companies in the S&P 500 reporting results, below are the beat rates for Q1 relative to the final results from recent quarters. Do not extrapolate these numbers yet as it is still very early in the reporting season.

Quarter           EPS beats        Rev beats

Q1 ‘21              74%                  68%

Q4 ’20              78%                  69%     

Q3 ‘20              84%                  74%

Q2 ‘20              85%                  65%

Q1 ‘20              65%                  59%

Q4 ’19              74%                  64%     

Q3 ‘19              78%                  58%

Q2 ‘19              76%                  56%

Q1 ‘19              77%                  57%

Q4 ’18              73%                  60%     

Q3 ’18              82%                  61%     

Q2 ‘18              84%                  72%

Q1 ‘18              81%                  74%

Q4 ’17              78%                  76%     

Q3 ’17              78%                  68%     

Q2 ‘17              77%                  69%

Q1 ’17              78%                  63%

Average          78%                  65%

From a growth standpoint, Q1 EPS so far has been -1.9% y/o/y; versus analysts’ expectation of +24.0%. Q1 revenue has been +4.8% y/o/y. However, it is still very early in the reporting season. This compares to +5.2% and +2.7% respectively in all of Q4. Below are some of the higher-profile companies that reported earnings this week.  

Earnings Recap

Symbol            Actual  Estimate

PAYX               0.96      0.93

CCL                  -2.12     -1.68

CAG                 0.59      0.59

STZ                  1.82      1.57                                         

Economics Recap

Better (or higher) than expected:

  • ISM Services Index for Mar: 63.7 vs. 59.0 est
  • JOLTS for Feb: 7.367M vs. 6.9M est
  • Consumer Credit for Feb: $27.58B vs. $2.80B est
  • Producer Price Index (PPI) for Mar: +1.0% vs +0.5% est
  • Core PPI for Mar: +0.7% vs. +0.2% est

On Target:

  • None

Worse (or lower) than expected:

  • Factory Orders for Feb: -0.8% vs. -0.5% est
  • Trade Deficit for Feb: -$71.1B vs. -$70.5B est
  • Initial (weekly) Jobless Claims: 744k vs. 680k est

This was a rather light week for economic data. Especially notable were the headline and Core PPI reports for March, both of which came in well above expectations. As a result, year/over/year PPI is now at its highest level since mid-2011. While this measures inflation at the wholesale or manufacturing level, next week’s Consumer Price Index (CPI) report will likely reflect higher prices too and may bring inflation concerns back to the top of investors’ minds.

PPI

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Also notable, the Job Openings and Labor Turnover Survey (JOLTS) which measures the net number of job openings after taking into account hires, quits, layoffs and discharges at thousands of companies. This was a standout because it not only came in way above expectations; it also hit a 2 year high. While the labor market has not yet fully recovered, this is yet another report that helps illustrate a steadily improving trend.

JOLTS

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Market Performance YTD

Here is the 2021 YTD (versus 2020 full-year) performance of the market broken down by the 11 market sectors (as of the close on 4/8/21):

                                                          2021 YTD                     2020 Final   

  1. Energy                                      +28.0%                         -37.3%
  2. Financials                                 +18.0%                         -4.1%
  3. Communications Svc             +13.3%                         +22.2%
  4. Industrials                                 +12.3%                         +9.0%
  5. Real Estate                               +10.5%                         -5.2%
  6. Materials                                   +9.4%                           +18.1%
  7. Info Tech                                   +7.7%                           +42.2%
  8. Consumer Disc                         +7.1%                           +32.1%
  9. Utilities                                     +3.3%                           -2.8%
  10. Healthcare                                +2.7%                           +11.4%
  11. Cons Staples                            +1.7%                           +7.6%

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2021 YTD (versus 2020 full-year) performance of the major U.S. equity indices (as of the close on 4/8/21):

                                                            2021 YTD                     2020 Final

  • S&P 500 (SPX)                            +9.1%                           +16.3%
  • Nasdaq Composite (COMPX)  +7.3%                           +43.7%
  • Dow Industrials (DJI)                +9.5%                           +7.2%
  • Russell 2000 (RUT)                   +13.5%                         +18.4%

Technicals

Equities have largely shrugged off inflation concerns as they continue to march higher and higher into record territory. As I’m writing this mid-day Friday (4/9) the SPX is +0.3%, so it seems likely that it will have closed at yet another new high by the time you read this. If for some reason it doesn’t do that, the last high of 4,097 from Thursday (4/8) would be the new upside resistance level; otherwise the close on Friday (4/8) will be it. On the downside, keep your eye on the 50-day SMA (currently 3,913) and then 3,850 which I believe is a potential area to watch for an earnings season pullback, before the dip buyers step in.

SPX

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

2009-10 Roadmap

As you can see below, with a +1.9% rally this week, the current SPX has now surpassed the target implied by the 2009-10 Roadmap. As a result, it is now running about 8 percentage points above the 2010 trend. While past performance is no guarantee of future results, I continue to believe we may see some weakness when earnings season begins next week. However, I don’t expect it to be as sharp or as long as the 2010 correction, which was about -16% and lasted about 9 weeks. As we have seen several times since the March 2020 bear market, pullbacks tend to be met with dip buyers fairly quickly, and that will likely occur again. As a result, I believe a downturn to about 3,850 (-6%) is more likely. Additionally, I believe a year-end target of about 4,300 may now be attainable.  

Roadmap

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Option Volumes:

After just a week of trading, April volume is averaging 33.5M contracts per day. That is below the final March level of 39.3M contracts per day but well above the April 2020 level of 26.2M contracts per day. For comparison purposes, January 2021 is still the current all-time record month with 44.3M contracts per day.

Open Interest:

OI Change:

The following data comes from the Chicago Board Options Exchange (Cboe) where about 98% of all index options, about 20% of all Exchange Traded Product (ETP) options, and about 13% of all equity options are traded:

In reviewing the VIX OI Change for the past week I observed the following:

  • VIX call OI was +9.4%              
  • VIX put OI was -0.1%               

These changes reflect a clear bias toward the call side, so I see the VIX OI Change as bearish for the market in the near-term.    

In reviewing the SPX OI Change for the past week I observed the following:

  • SPX call OI was +7.6%
  • SPX put OI was +6.7%             

These changes reflect a very small bias toward the call side, so I see the SPX OI Change as moderately bullish for the market in the near-term.  

In reviewing the ETP OI change (which includes SPY, QQQ, DIA & IWM) for the past week I observed the following:

  • ETP call OI was +2.7%             
  • ETP put OI was +4.6%             

These changes reflect a small bias toward the put side, so I see the ETP OI Change as moderately bearish for the market in the near-term.

In reviewing the Equity OI Change for the past week I observed the following:

  • Equity call OI was +3.5%                      
  • Equity put OI was +3.4%                       

These changes reflect an insignificant bias toward the call side, so I see the Equity OI Change as neutral for the market in the near-term.

OI Participation

Index OI Participation is -26% versus 2020 levels, so I see it as bearish in the long-term.

Equity/ETF OI Participation is +33% versus 2020 levels, so I see it as bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is down 8 ticks to 0.83 versus 0.91 last week. At this time, VIX options traders are holding (long or short) 83 puts for every 100 calls. Historically, this ratio tends to move in the same direction as the VIX index, so the fact that it is down sharply this week is a little surprising given the VIX index was only -0.38 (-2.2%) through Thursday (4/8). However, it is important to note that on Thursday (4/8) the VIX closed below 17 for the first time in more than 13 months, so while this week’s move was small, the level is quite low, at least on a relative basis. This ratio is now at a 6-month low, though it was substantially lower in September and October of last year. Still, it likely implies that VIX option traders are growing more concerned that a VIX spike may be on the horizon in the near-term. Therefore, I see the VIX OIPCR as moderately bearish in the very near-term for the markets. This ratio is now also below the 200-day SMA of 0.92, so I see it as now moderately bearish in the long-term.

The SPX OIPCR is up 1 tick to 2.12 versus 2.11 last week. This ratio tends to move in the same direction as the SPX, but this is a relatively small move given the SPX has risen 77.30 points (+1.9%) through Thursday (4/8). It is also several ticks below where it was early last week. As a result, this small uptick likely indicates that SPX option traders (who are almost entirely institutional) may not terribly concerned about the current level of the SPX, despite it being at all-time highs. Therefore, I see the SPX OIPCR as neutral in the near-term for the market. This ratio remains well above the 200-day SMA of 1.93, but it is still lower than it was before the Q1 2020 bear market. I see it as neutral in the long-term.

The normally stable Equity OIPCR is unchanged again at 0.74 versus 0.74 last week. This ratio has now been at an extreme low for 3 months. At this level, it continues to indicate that many retail traders remain unprepared for a market pullback in the near-term. Therefore, I see the Equity OIPCR as still bearish in the near-term for the market. However, this ratio remains well below the 200-day SMA of 0.81, so I see it as still bullish in the long-term.

Cboe Volume Put/Call Ratios (VPCR):

The Cboe VIX VPCR has been mostly neutral this week. The 0.57 reading on Thursday (4/8) was neutral but the current reading of 0.27 as I’m writing this (mid-day Friday 4/8) is moderately bearish. While these ratios tend to decline as the day goes on, I see it as neutral in the very near-term.

The Cboe SPX VPCR has moved from neutral to moderately bearish this week. The 1.74 reading on Thursday (4/8) was moderately bearish and the current reading of 1.69 as I’m writing this (mid-day Friday 4/8) is moderately bearish again. While intraday levels tend to decline as the day goes on, I see it as moderately bearish in the very near-term. With a 5-day moving average of 1.64 versus 1.50 last week, it is also moderately bearish in the long-term.

The Cboe Equity VPCR has moved from a bullish extreme back to bullish this week. The 0.45 reading on Thursday (4/8) was bullish, and the current reading of 0.56 as I’m writing this is moderately bullish. Since this ratio tends to decline as the day goes on, I see it as bullish in the very near-term. With a 5-day moving average of 0.45 versus 0.48 last week I see it as bullish in the long-term. As noted below, long-term for this ratio is about a week or two.

Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week or two.

OCC Volume Put/Call Ratios (VPCR):

The OCC Index VPCR has moved from moderately bearish (>1.10) to neutral (>0.90) this week. As a result, I see it as neutral in the near-term. However, it has also been moderately bearish in 14 of the last 15 sessions, so I see it as moderately bearish in the long-term.

The OCC Equity VPCR has been bullish (<0.63) all week, so I see it as bullish in the near-term. With a 5-day average of 0.54 versus 0.63 last week, it is bullish in the long-term.

Volatility:

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 4/8), the VIX is nearly unchanged around 17. At its current level, the VIX is implying intraday moves in the SPX of about 36 points per day (this was 38 last week). The 20-day historical volatility is 98% this week versus 110% last week. The VIX remains well below its long-term average (19.57) but well above its long-term mode (12.42) which I consider to be “normal” volatility. With the VIX essentially at a 13-month low as I’m writing this, I see the VIX as bullish in the very near-term for the equity markets. I see it as moderately bullish in the long-term too.

On a week-over-week basis, VIX call prices are modestly lower and VIX put prices are little changed. At +143 versus +168 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is a bit lower. As a contrarian indicator and still above +100, I see it as still moderately bearish in the very near-term. Since this week’s move is little change from the past 4 weeks, I see the VIX IV Gap as neutral in the long-term.

Keep in mind, this is not only a contrarian indicator most of the time, it tends to be one of the earliest and shortest-term indicators I discuss in this report, so it can also change directions very quickly.

VIX Futures

At the moment, the difference between the sum of the 3rd and 4th month futures and the 1st and 2nd month futures is +5.93 versus +4.87 last week. This increase is mostly due to a drop in the price of the near-term contracts whereas the long-term contracts are little changed.      

As of this writing (mid-day Friday 4/8) the nearest VIX futures contract (which expires on 4/14) was trading at 18.15; more than a point above the spot VIX level of 17.01. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 17.80; less than a point above the spot price.

With an adjusted level that is less than a point above the spot price, futures traders are indicating that they believe the VIX is likely to stay fairly close to its current level over the next few days. Therefore, I see VIX futures as neutral in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 17.96 and 19.04 respectively. With the RPAPs of the further-dated contracts only about 1 and 2 points respectively above the spot price, I see VIX futures as neutral in the long-term for the SPX.

Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.

With the VIX falling slightly this week, the VIX Hedging Effectiveness has fallen to Poor in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing very little sensitivity to market volatility and are unlikely to be effective as hedging tools in the very near-term. VIX Hedging Effectiveness remains Moderate in the long-term.

VIX Hedging Effectiveness is a manner of measuring the magnitude of VIX moves relative to the magnitude of SPX moves in the opposite direction. When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.

Global Review/Outlook:

Asia

Continuing the process that began under the Trump administration, this week the Commerce Department added 7 additional Chinese technology firms to the list of companies that are banned from doing business with US firms. As before, this action was justified as being in the interest of national security, as the banned companies build computers for the Chinese military. China’s Foreign Ministry responded by saying that US oppression will not stop China’s technology progress, instead it will make them more determined to speed up their innovation.

North America

Fed Chair Jay Powell said on Thursday (4/8) that while the US economy continues to improve, vaccination rates around the world will be critical to the global economy. Tens of millions of Americans are now fully vaccinated and while he spoke positively about vaccination progress in other advanced economies too, he stressed the importance of helping emerging market countries, some of whom have vaccinated less than 1% of their populations.

The virus trends have improved in some areas and worsened in others. In the past week the US added more than 531k new coronavirus cases (versus 437k last week) and more than 8.0k new deaths (versus 6.5k last week). As you can see in the table below, COVID-19 cases worldwide now exceed 128M (versus 128M last week) of which the US accounts for over 30.5M or 24% (versus 24% last week) even though the US only accounts for about 4.3% of the world’s population. At >551k, the US accounts for 20% of all global deaths (versus 20% last week).

Virus

Source: Johns Hopkins University and other sources; accuracy not guaranteed

Europe

This week the UK added 269 new deaths (versus 334 last week). Germany added 1,399 new deaths (versus 961 last week). France added 1,648 new deaths (versus 2,705 last week).

Elsewhere

This week India added more than 4,300 new deaths (versus 1,700 last week). Brazil added more than 23,100 new deaths (versus 16,900 last week). Russia added more than 2,900 new deaths (versus 2,200 last week).

Economic reports for next week:

Mon 4/12

Treasury Budget for Mar - The monthly treasury budget measures year to year changes in tax receipts and outlays. Since most taxes are collected in April, the market usually does not react much to this report during the other 11 months of the year.

Tue 4/13

CPI for MarThe Consumer Price Index measures the change in the average price level (inflation or deflation) of a fixed basket of goods and services, relative to the price levels from the base year of 1984.

Wed 4/14

International Trade (Import & Export Prices) for Mar – This report tracks the prices of goods bought in the US but produced abroad and the prices of goods sold abroad but produced in the US, respectively. Price changes are impacted by inflationary pressures and currency exchange rates.

Thu 4/15

Initial Jobless Claims - For the week ending 4/3/21, claims were up 16k after being up 70k the prior week. The 4-week moving average now stands at 728k, down 5k from the prior week, but still well above the pre-pandemic level of 233k.

Retail Sales for Mar – This report is a widely watched gauge of consumer sentiment and spending habits.

Industrial Production & Capacity Utilization for MarIndustrial production measures industrial output as a percentage, relative to output from 2007. Capacity Utilization measures output potential as a percentage, relative to the actual output from 2007. 

Business Inventories for Feb – This is a lagging indicator since all of the components have been previously released.

NAHB Housing Market Index for Apr – This is a composite index (ranging from 0 – 100) comprised of Single-family home sales, Future sales expectations, and Buyer traffic, and is viewed as an indicator of new home sales trends. Collectively, the components are intended to provide a gauge of overall conditions in the market for selling new homes.

Fri 4/16

Housing Starts and Building Permits for Mar – Housing starts measure the beginning of the excavation of the land on which a new single or multi-family residence will be built, and is used as a gauge of housing demand and strength in the construction industry. Building permits are required before excavation can begin, and any changes in permits are often reflected in starts in subsequent months.

University of Michigan Consumer Sentiment for Apr – This is the first report for April. The final report for March improved to 84.9 from 76.3 previously.

Interest Rates:

Interest rates on the 10-year Treasury Note ticked down from 1.75% to 1.63% during the first 4 sessions of the week, until the PPI was released causing a jump back up to 1.68% in the premarket on Friday (4/9).

Outlook:

With a 5% rally in less than 3 weeks, equities are due for a bit of consolidation in the near-term. The indicators point to a quiet sideways week next week, before a potentially more turbulent Q1 earnings season arrives.

Bottom Line:

While I continue to have concerns that we may be due for a modest pullback when earnings season starts toward the end of April, that is still a couple weeks out. In the meantime, the indicators say equities are likely to consolidate a bit following a strong rally over the past few weeks. As you can see below, there were more upgrades than downgrades this week and overall, the indicators now average out to about Neutral for next week.

Composite

Past performance is no guarantee of future results.

Key:

OI = Open Interest

OIPCR = Open Interest Put/Call Ratio

VPCR = Volume Put/Call Ratio

IV = Implied Volatility

+ means this indicator has changed in a bullish direction from the prior posting.

– means this indicator has changed in a bearish direction from the prior posting.

+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.

^ means this indicator is at a historical extreme that has often (though not always) preceded a market reversal.