Trading | July 30, 2021

Weekly Trader’s Outlook

Equities consolidate as expected.

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Weekly Market Review:

Earnings Summary

Q2 earnings season has now passed the midpoint. With 294 (59%) of the companies in the S&P 500 reporting results, below are the beat rates for Q2 relative to the final results from recent quarters.

Quarter       EPS beats        Rev beats

Q2 ‘21            87%                  84%

Q1 ‘21               87%                  72%

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%

Average          79%                  65%

From a growth standpoint, Q2 earnings are +100% y/o/y so far versus the +62% estimate when the quarter ended. Q2 revenue is +26.9% y/o/y so far versus the +18% estimate. This compares to +35.1% and +10.9% respectively in all of Q1. Among the 170 companies that reported earnings this week, 88% topped expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Economics Recap

Better (or higher) than expected:

  • Case-Shiller Home Price Index for May: +16.99% vs. +16.33% est
  • Consumer Confidence for Jul: 129.1 vs. 123.9 est
  • Personal Income for Jun: +0.1% vs. -0.3% est
  • Personal Spending for Jun: +1.0% vs. +0.7% est
  • Chicago PMI for Jul: 73.4 vs. 64.2 est
  • University of Michigan Consumer Sentiment for Jul: 81.2 vs. 80.8 est

On Target:

  • None

Worse (or lower) than expected:

  • New Home Sales for Jun: 676k vs. 796k est
  • Durable Goods Orders for Jun: +0.8% vs. +2.2% est
  • GDP (Advance) for Q2: 6.5% vs. 8.4% est
  • Initial (weekly) Jobless Claims: 400k vs. 385k est
  • Pending Home Sales for Jun: -1.9% vs. 0.0% est
  • Core PCE Prices for Jun: +0.4% vs. +0.6% est
  • Employment Cost Index for Q2: +0.7% vs. +0.9% est

This was a heavy week for economic data. Probably the biggest disappointment was the first (advance) report on Q2 GDP, which came in 1.9 percentage points below the estimate and barely above the +6.3% level in Q1. Keep in mind that this is a seasonally adjusted annual rate. The 4-quarter average is now +12.6%.

At 400k, Initial Jobless Claims came in above the 385k estimate but below last week’s 424k level. Claims are now averaging 393k for the past 4 weeks. Aggregate initial jobless claims over the past 71 weeks (since the virus hit) now exceed 91M. Claims were below 400k for just 3 weeks, but are now back above 400k for the last 2 weeks. Continuing claims, which have been steadily declining for the past 15 months, still exceed 3.2M (was 1.7M pre-virus).

Claims

Source: Schwab Center for Financial Research

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 7/29/21):

                                                       2021 YTD                     2020 Final              Category

  1. Energy                                      +32.9%                         -37.3%                          Defensive
  2. Real Estate                               +26.9%                         -5.2%                            Cyclical
  3. Financials                                 +24.7%                         -4.1%                            Cyclical
  4. Communications Svc             +23.7%                         +22.2%                         Defensive
  5. Info Tech                                   +17.7%                         +42.2%                         Cyclical
  6. Industrials                                 +16.8%                         +9.0%                           Cyclical
  7. Healthcare                                +16.1%                         +11.4%                         Defensive
  8. Materials                                   +15.3%                         +18.1%                         Cyclical
  9. Consumer Disc                         +13.6%                         +32.1%                         Cyclical
  10. Cons Staples                            +6.0%                           +7.6%                           Defensive
  11. Utilities                                     +6.0%                           -2.8%                            Defensive

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 7/29/21):

                                                            2021 YTD                  2020 Final

  • S&P 500 (SPX)                           +17.7%                         +16.3%
  • Nasdaq Composite (COMPX)  +14.7%                         +43.7%
  • Dow Industrials (DJI)                 +14.6%                         +7.2%
  • Russell 2000 (RUT)                    +13.4%                         +18.4%

Technicals

While the SPX did manage to eke out a new high on Monday (7/26) this was mostly a sideways consolidation week as shown by the relatively short candles in the chart below. While the SPX was up a few points at the close on Thursday (7/29), at the time of this writing (mid-day Friday 7/30), it is about 8 points below last Friday’s close, so it’s safe to say that last week’s “Neutral” outlook was on target.

Since another new high seems unlikely at the moment, the 7/26 high (4,422) remains the upside resistance level. To the downside, the first level of support is the 50-day SMA (currently 4,283) followed by the 100-day SMA (currently 4,182).

SPX

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes:

As the month comes to a close, July is averaging a healthy 37.8M contracts per day; just below the final June level of 39.5M contracts per day but well above the July 2020 level of 27.9M contracts per day. January 2021 remains the all-time record month with 44.3M contracts per day, and February 2021 is second with 43.3M 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 14% of all equity options are traded:

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

  • VIX call OI was +4.6%              
  • VIX put OI was +5.7%              

These changes reflect a small bias toward the put side, so I see the VIX OI Change as moderately bullish 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 +1.6%
  • SPX put OI was +0.9%             

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 +3.2%             
  • ETP put OI was +3.2%            

These changes reflect no bias toward the call or put side, so I see the ETP OI Change as neutral 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 +3.6%                      
  • Equity put OI was +3.3%                       

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 +8.4% versus 2020 levels, so I see it as moderately bullish in the long-term.

Equity/ETF OI Participation is +32.5% versus 2020 levels, so I see it as bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is up 1 tick to 0.49 versus 0.48 last week. This ratio tends to move in the same direction as the VIX index, so this small uptick is completely consistent with the VIX which was +0.50 (+2.9%) through Thursday (7/29). However, this is a very small move, so I see the VIX OIPCR as neutral in the very near-term for the markets. This ratio is still above its pre-pandemic levels, but it remains well below the 200-day SMA of 0.86. Therefore, I see it as moderately bearish in the long-term.

The SPX OIPCR is up 4 ticks to 2.37 versus 2.33 last week. This ratio tends to move in the same direction as the SPX, so this small uptick is not too surprising since the SPX has risen 7.36 points (+0.2%) through Thursday (7/29). As a result, this likely indicates that SPX option traders (who are almost entirely institutional) have added just a few more hedges as the SPX eked out a new high earlier this week. However, this is a small move, so I see the SPX OIPCR as neutral in the near-term for the market. This ratio is now 6 ticks below its recent 16-month high, but it remains well above the 200-day SMA of 2.10. I see it as still moderately bearish in the long-term.

The normally very stable Equity OIPCR is unchanged at 0.79 this week versus 0.79 last week. At this level it implies that equity option traders (which includes a lot of retail traders) have maintained about the same level of bullishness as last week. Therefore, I see the Equity OIPCR as moderately bullish in the near-term for the market. This ratio remains just above the 200-day SMA (currently 0.78), so I see it as also moderately bullish in the long-term.

Cboe Volume Put/Call Ratios (VPCR):

The Cboe VIX VPCR been mostly neutral this week. The 0.69 reading on Thursday (7/29) was neutral and the current reading of 0.81 as I’m writing this (mid-day Friday 7/30) is neutral. Since this ratio tends to decline as the day goes on, I see it as neutral in the very near-term.

The Cboe SPX VPCR has been moderately bearish this week. The 1.70 reading on Thursday (7/29) was moderately bearish, but the current reading of 1.07 as I’m writing this (mid-day Friday 7/30) is moderately bullish. Since intraday levels tend to decline as the day goes on, I see it as neutral in the very near-term. With a 5-day moving average of 1.73 versus 1.83 last week, it remains moderately bearish in the long-term.

The Cboe Equity VPCR has been mostly moderately bullish (<0.60) this week. The 0.48 reading on Thursday (7/29) was bullish, but the current reading of 0.62 as I’m writing this is neutral. Since this ratio tends to decline as the day goes on, I see it as moderately bullish in the very near-term. With a 5-day moving average of 0.55 versus 0.52 last week, I see it as moderately 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 bearish (>1.40) to moderately bearish (>1.10) this week. As a result, I see it as moderately bearish in the near-term. It has been mostly moderately bearish for the past 5 weeks, so I see it as moderately bearish in the long-term.

The OCC Equity VPCR has been mostly bullish (<0.63) this week, so I see it as bullish in the near-term. With a 5-day average of 0.59 versus 0.63 last week, it is bullish in the long-term too.

Volatility:

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 7/30), the VIX is +0.68 to 18.38. At its current level, the VIX is implying intraday moves in the SPX of about 42 points per day (this was 39 last week). The 20-day historical volatility is 145% this week versus 139% last week. The VIX is just below its long-term average (19.57) but still well above its long-term mode (12.42) which I consider to be “normal” volatility. With the VIX up modestly from last week, I see the VIX as moderately bearish in the very near-term for the equity markets. However, with the VIX well above pre-pandemic levels, I see it as neutral in the long-term.

On a week-over-week basis, VIX call prices have fallen while VIX put prices have risen. At +119 versus +199 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is lower, and at this level is back to neutral in the very near-term. The VIX IV Gap has leveled off over the past 4 weeks, so I see it as now 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

As of this writing (mid-day Friday 7/30) the nearest VIX futures contract (which expires on 8/4) was trading at 18.80; less than a half point above the spot VIX level of 18.38. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 18.44; extremely close to the spot price.

With an adjusted level that is very close to the spot price, futures traders are indicating that they believe the VIX is likely to stay fairly flat 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 19.18 and 19.48 respectively. With the RPAPs of the further-dated contracts about a point above the spot price, I see VIX futures as moderately bearish 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 up modestly this week, the VIX Hedging Effectiveness remains Good in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing good sensitivity to market volatility, and may be somewhat effective as hedging tools in the very near-term. VIX Hedging Effectiveness also increases to Good 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 News:

COVID-19

This week President Biden announced that all federal workers will be required to be vaccinated against Covid-19 or they will need to be tested regularly. California, New York, and hundreds of colleges and universities have announced similar policies requiring either proof of vaccination or recurring proof of a negative coronavirus test. New research indicates that while vaccinations remain highly effective against the coronavirus, some vaccinated people are getting it, though with less severe symptoms. Vaccinated people can also pass the virus to children and other unvaccinated individuals, so masking is once again recommended for everyone. Nationally, only about two thirds of eligible citizens have been vaccinated, despite widespread availability.

As the chart shows below, the Centers for Disease Control (CDC) reported this week that the US is averaging about 50,000 new cases per day, up sharply from about 10,000 only 4 weeks ago, but clearly still well below the previous peak in January. As I have stated for the past 2 weeks, “If there is a downside risk to equities, this is probably it”.

Covid Cases

Source: Bloomberg L.P.

Economic reports for next week:

Mon 8/2

ISM Manufacturing Index for Jul - The Institute for Supply Management (ISM) Manufacturing Index tracks economic data from companies in the manufacturing sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the manufacturing sector are on the rise.  

Construction Spending for Jun – Construction spending measures new overall construction activity. This report can predict future activity in housing and commodities, which can be a sign of economic growth.

Tue 8/3

Factory Orders for Jun – This report includes both durable and non-durable goods orders, as well as wholesale and retail inventories. Like the construction report, it usually doesn’t impact the market much.

Wed 8/4

ADP Employment Change for JulThe ADP report is based on information from approximately 400,000 U.S. businesses and 23 million U.S. employees in the private sector. While the ADP report is often looked at as a predictor of the BLS (Bureau of Labor Statistics) nonfarm payrolls report, ADP data does not include government jobs, so there is sometimes a significant difference between the two.

ISM Services Index for Jul – The Institute for Supply Management (ISM) Non-Manufacturing Index tracks economic data from companies in the services sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the services sector are on the rise.

Thu 8/5

International Trade (Trade Balance) for JunThis report tracks trends in the exports and imports of goods and services. Exports can indicate economic expansion both in the U.S. and abroad. Imports can indicate growing domestic demand. However, this is a lagging report, so it rarely has any impact on the market.

Initial Jobless Claims - For the week ending 7/24/11, claims were down 19k after being up 51k the prior week. The 4-week moving average now stands at 393k, up 7k from the prior week, and still well above the pre-pandemic level of 233k.

Fri 8/6

Monthly Employment Reports for Jul – This is the biggest group of reports each month. It includes:

  • Nonfarm Payrolls
  • Unemployment (U-3) Rate
  • Average Hourly Earnings
  • Average Workweek
  • Underemployment (U-6) Rate
  • Labor Force Participation Rate

Interest Rates:

With the regularly scheduled FOMC meeting on Tuesday (7/27) and Wednesday (7/28) followed by Fed Chair Powell’s press conference, there was a little volatility in the Treasury markets. After starting the week down at about 1.25% on Monday (7/26), the interest rate on the 10-year Treasury Note ($TNX) rose to about 1.28% by early Thursday morning, only to drop all the way back down to 1.22% by mid-day Friday.  

Outlook:

After setting a new high followed by a brief period of consolidation, the indicators say that traders may be back in a buying mood again next week.

Bottom Line:

As you can see below, there were several more upgrades than downgrades this week. While news of more delta variant coronavirus cases is likely to continue to dampen sentiment somewhat, strong earnings and ample liquidity are likely to keep markets in a moderately bullish mode for now. The net outlook for next week overall is Moderately Bullish.

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.

What You Can Do Next

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