Trading | October 15, 2021

Weekly Trader’s Outlook

Equities finally find some footing on strong earnings, despite higher inflation.

Follow me on Twitter @RandyAFrederick. I’ll tweet interesting observations about volatility, put/call ratios, technical signals, economics, option block trades and other unusual activity.

Weekly Market Review:

Earnings Summary

Q3 earnings season has just begun. So far, 38 (8%) of the companies in the S&P 500 have already reported Q3 results. Below are the beat rates relative to the final results from recent quarters.

Quarter      EPS beats        Rev beats

Q3 ‘21            79%                  76%

Q2 ‘21              86%                  83%

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, Q3 earnings are +38.5% y/o/y so far versus the +29.6% estimate when the quarter ended. Q3 revenue is +12.4% y/o/y versus the +14.9% estimate when the quarter ended. This compares to +92.0% and +25.3% respectively in all of Q2. This week, 20 S&P 500 companies reported earnings and 18 of them beat 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:

  • Consumer Price Index (CPI) for Sep: +0.4% vs. +0.3% est
  • Initial (weekly) Jobless Claims: 293k vs. 330k est
  • Producer Price Index (PPI) for Sep: +0.5% vs. +0.6% est
  • Core PPI for Sep: +0.2% vs. +0.5% est
  • Retail Sales for Sep: +0.7% vs. -0.2% est

On Target:

  • Core CPI for Sep: +0.2% vs. +0.2% est
  • Business Inventories for Aug: +0.6% vs. +0.6% est

Worse (or lower) than expected:

  • NFIB Small Business Optimism Index for Sep: 99.1 vs. 99.5 est
  • Job Openings and Labor Turnover Survey for Aug: 10.439M vs. 10.954M est
  • Import Prices for Sep: +0.4% vs. +0.6% est
  • Export Prices for Sep: +0.1% vs. +0.7% est
  • University of Michigan Consumer Sentiment for Oct: 71.4 vs. 73.1 est

This was an average week for economic data. At 293k, Initial Jobless Claims came in below the 320k estimate and below last week’s 329k level. Claims are now averaging 330k for the past 4 weeks. This was the second consecutive downtick, and it’s about time; I’ve been expecting this to happen since Labor Day, when the enhanced unemployment benefits ended. Aggregate initial jobless claims over the past 83 weeks (since the virus hit) exceed 95M.

Claims

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

As we’ve seen for the past 5 months, September Core CPI showed a large jump in year/over/year inflation, but it is still being exaggerated by a very low comparison number. In September 2020 the economy was just starting to recover from the pandemic. At +5.4% y/o/y (yellow line) the change in core inflation (ex-food and energy) was definitely higher, but if you remove the 2020 dip and follow the longer-term trend, it is a much more gradual increase from 2019 (red line). If you extrapolate the pre-pandemic trend, the increase from the September 2020 theoretical level (if there had been no pandemic) would be more like +3.0%; still above the Fed’s 2% target, but not as high as it seems.

CPI

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 10/14/21):

                                               2021 YTD                     2020 Final                 Category

  1. Energy                                     +51.1%                         -37.3%                          Defensive
  2. Financials                                 +32.0%                         -4.1%                            Cyclical
  3. Real Estate                               +26.6%                         -5.2%                            Cyclical
  4. Communications Svc             +22.4%                         +22.2%                         Defensive
  5. Info Tech                                   +18.6%                         +42.2%                         Cyclical
  6. Materials                                   +15.6%                         +18.1%                         Cyclical
  7. Industrials                                 +15.0%                         +9.0%                           Cyclical
  8. Consumer Disc                         +13.4%                         +32.1%                         Cyclical
  9. Healthcare                                +12.1%                         +11.4%                         Defensive
  10. Cons Staples                            +5.7%                           +7.6%                           Defensive
  11. Utilities                                     +4.9%                           -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 10/14/21):

                                                          2021 YTD                     2020 Final

  • S&P 500 (SPX)                             +18.2%                         +16.3%
  • Nasdaq Composite (COMPX)    +15.0%                         +43.7%
  • Dow Industrials (DJI)                 +14.1%                         +7.2%
  • Russell 2000 (RUT)                    +15.2%                         +18.4%

Technicals

As I mentioned 2 weeks ago, I expected Q3 to be relatively flat; with a net gain of only +0.2%; it was. I had been expecting a pullback of about 4% - 7% for a couple of months; we finally got -5.2% in September. I have been optimistic about Q4 all along, but only if Congress raised the debt ceiling; that happened on Tuesday (10/12).

During my TV appearance on Yahoo Finance (https://twitter.com/i/status/1448294016626401288) on Thursday (10/13) I was asked by host Brian Sozzi, “…do you think we're one or two bad reports away from heading back to those lows we saw a couple of weeks ago in the markets?” to which I replied, “…I don't think so for a couple of reasons… the debt ceiling and the government shutdown. We've now punted both of those things out into December. We're coming out of about a 5%, almost 5.5%, pullback here. I actually think that as this quarter progresses, we might actually trend more back towards the all-time highs rather than back down to the lows. I believe that trend began on Wednesday (10/13). So far, so good, but I’ll revisit this outlook in the coming weeks to see how things are progressing.

When the SPX closed above the 50-day SMA on Thursday (10/14), it was a technically bullish signal and as of the time of this writing (mid-day Friday 10/15) that momentum appears to have carried through. The 9/2 closing high (4,536) remains the ultimate upside resistance level. And unless there is a sharp afternoon selloff today, the 50-day SMA (currently 4,436) should provide some near-term downside support followed by the 100-day SMA (currently 4,369).

SPX

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes:

Middway through October, option volumes are averaging a very robust 36.8M contracts per day; below the final September level of 38.9M contracts per day but well above the October 2020 level of 28.9M 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 +3.7%              
  • VIX put OI was +0.4%              

These changes reflect a moderate bias toward the call side, so I see the VIX OI Change as moderately 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 +1.2%
  • SPX put OI was +0.9%             

While SPX volume tends to be mostly institutional hedging, these changes reflect an insignificant bias toward the call side, so I see the SPX OI Change as neutral 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 +2.0%             
  • ETP put OI was +1.2%            

These changes reflect a very small bias toward the call side, so I see the ETP OI Change as moderately bullish 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 +3.1%                      
  • Equity put OI was +2.6%                       

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

OI Participation

Index OI Participation is +14.0% versus 2020 levels, so I see it as bullish in the long-term.

Equity/ETF OI Participation is +24.6% versus 2020 levels, so I see it as bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is down 3 ticks to 0.69 versus 0.72 last week. This ratio tends to move in the same direction as the VIX index, so this move is consistent with the VIX which was -1.91 (-10.2%) through Thursday (10/14). As a result, it likely indicates that participants may not be expecting the VIX to fall much further over the next few days. As a result, I see the VIX OIPCR as neutral in the very near-term for the markets. This ratio remains well below its recent 3-month high and below the 200-day SMA of 0.75, so I see it as neutral in the long-term.

The SPX OIPCR is up 2 ticks to 2.13 versus 2.11 last week. Since this ratio tends to move in the same direction as the SPX, this uptick is consistent with the SPX which has risen 46.92 points (+1.1%) through Thursday (10/14). At this level, it indicates that SPX option traders (who are almost entirely institutional) may be expecting the SPX to rise a little slower early next week. Therefore, I see the SPX OIPCR as moderately bullish in the near-term for the market. This ratio has fallen 29 ticks since mid-September and is now below the 200-day SMA of 2.19. I see it as moderately bullish in the long-term.

The normally very stable Equity OIPCR is unchanged at 0.78 this week versus 0.78 last week. This ratio has barely moved in 3 weeks and it remains at its lowest level since mid-July. At this level it implies that equity option traders (which includes a lot of retail traders) have maintained the same level of bullishness since last week. Therefore, I see the Equity OIPCR as moderately bullish in the near-term for the market. This ratio also remains just slightly above the 200-day SMA (currently 0.77), so I see it as moderately bullish in the long-term too.

Cboe Volume Put/Call Ratios (VPCR):

The Cboe VIX VPCR has been moderately bullish this week. The 1.27 reading on Thursday (10/14) was moderately bullish and the current reading of 1.53 as I’m writing this (mid-day Friday 10/15) is moderately bullish. While this ratio tends to decline as the day goes on, I see it as moderately bullish in the very near-term.

The Cboe SPX VPCR has moved from moderately bearish to neutral this week. The 1.57 reading on Thursday (10/14) was neutral, but the current reading of 1.59 as I’m writing this (mid-day Friday 10/15) is neutral. While 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 1.87 versus 1.76 last week, it remains moderately bearish in the long-term.

The Cboe Equity VPCR has been mostly bullish (<0.50) this week. The 0.45 reading on Thursday (10/14) was bullish, but the current reading of 0.60 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 0.48 versus 0.52 last week, I see it as bullish in the long-term too. 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 been bearish (>1.40) this week. As a result, I see it as bearish in the near-term. It has been mostly bearish for the past 10 weeks too, so I see it as bearish in the long-term.

The OCC Equity VPCR has moved from moderately bullish (<0.80) to bullish (<0.63) to this week. Therefore, I see it as bullish in the near-term. With a 5-day average of 0.65 versus 0.67 last week, it is moderately bullish in the long-term.

Volatility:

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 10/15), the VIX is -1.03 to 15.83. At its current level, the VIX is implying intraday moves in the SPX of about 37 points per day (this was 42 last week). The 20-day historical volatility is 159% this week versus 160% last week. The VIX is now well below its long-term average (19.54) but still above its long-term mode (12.42) which I consider to be “normal” volatility. Since the VIX has dropped more than 4 points from its intraday high earlier this week, at this level I see the VIX as moderately bullish in the very near-term for the equity markets. The VIX is 10 points lower than it was just 3 weeks ago, so I see it as moderately bullish in the long-term too.

On a week-over-week basis, VIX call prices have risen while VIX put prices have fallen. At +196 versus +86 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is sharply higher, and at this level is moderately bearish in the very near-term. The VIX IV Gap has gone from negative back to positive and back again several times over the past 4 weeks, so I see it as volatile 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 10/15) the nearest VIX futures contract (which expires on 10/20) was trading at 16.85; about a point above the spot VIX level of 15.83. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 16.58; still ¾ of a point above the spot price.

With an adjusted level that is more than a half point above the spot price, futures traders are indicating that they believe the VIX is likely to tick modestly higher over the next few days. Therefore, I see VIX futures as moderately bearish in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 18.14 and 18.19 respectively. With the RPAPs of the further-dated contracts both more than 2 points 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 down about 2 points this week, VIX Hedging Effectiveness has fallen to Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing some sensitivity to market volatility, and may be moderately effective as hedging tools in the very near-term. VIX Hedging Effectiveness is 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

In September, the Centers for Disease Control and Prevention (CDCP) found that among the 3 major vaccine providers, effectiveness against hospitalization from COVID-19 was the highest for Moderna (2 shots), followed by Pfizer (2 shots) and then Johnson & Johnson (1 shot). This week the FDA will consider an Emergency Use Authorization (EUA) request from Johnson & Johnson for a booster shot, which J&J says resulted in 94% efficacy against moderate to severe COVID, compared with 70% for a single dose. Both Pfizer (whose booster was approved in September) and Moderna (whose booster is pending approval now) had about 90% efficacy from their original 2-shot regimen.  

As the chart below shows, the Centers for Disease Control (CDC) reported this week that the US is now averaging about 90,000 new cases per day (versus 100,000 last week). The current downtick has been going on for about 4 weeks now.

Cases

Source: Bloomberg L.P.

As the chart below shows, vaccination rates held fairly steady about 600k per day (versus 600k last week), though it will be interesting to see if the jump late in the week, continues.

Vaccinations

Source: Bloomberg L.P.

Economic reports for next week:

Mon 10/18

Industrial Production & Capacity Utilization for SepIndustrial 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. 

NAHB Housing Market Index for Oct – 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.

Tue 10/19

Housing Starts and Building Permits for Sep – 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.

Wed 10/20

None

Thu 10/21

Initial Jobless Claims - For the week ending 10/9/21, claims were down 36k after being down 35k the prior week. The 4-week moving average now stands at 330k, down 14k from the prior week, and still above the pre-pandemic level of 233k.

Existing Home Sales for Sep – This is a good measure of overall demand in the housing market, because it aggregates completed closings on all single-family dwellings, which comprise the largest portion of the housing market. Home buying can imply economic stability, since it is often the largest single investment for any family. It can also lead trends in future durable goods purchases.

Leading Economic Indicators for Sep – As you probably know, this is more of a trailing than a leading report since the 10 components have already been released. As a result, the market reaction is usually fairly muted.

Fri 10/22

None

Interest Rates:

On Wednesday (10/13) the minutes of the Federal Open Market Committee (FOMC) meeting from September were released. The minutes showed that most members felt the Fed was close to reaching its economic goals and should start to reduce the $120B monthly bond buys by cutting $10B per month in Treasuries and $5B per month in mortgage-backed securities, beginning in November or December. The reduction process is expected to take until about mid-2022 at after which the Fed may begin to raise interest rates. The Fed Funds Futures probability of an interest rate hike in June 2022 is currently about 20%.

Because Monday (10/11) was a bank holiday, starting at about 1.61% on Tuesday, interest rates on the 10-year Treasury Note ($TNX) fell modestly throughout most of the week. At the time of this writing (mid-day Friday 10/15) they were at 1.56%.

Outlook:

With the debt ceiling issue out of the way for now, earnings which have been pretty good so far, are likely to drive the equity markets in the near-term. The indicators point to continued positive momentum for next week.

Bottom Line:

Last week Nate Peterson stated, “It’s really tough to gauge which direction is likely for stocks next week – higher yields could negatively hit higher-multiple stocks and not all industries are going to be affected by supply chain issues equally”. With a top-to-bottom range of >140 points in the SPX and over 4½ points in the VIX, I’d say his “volatile” forecast was on the mark.

Two weeks ago I said, “…if Congress reaches an agreement and raises the debt ceiling, equities are likely to rally, but volatility is likely to persist until they do. The debt ceiling issue has now been punted out to December, and indeed the VIX has fallen sharply and the SPX is rallying. Earnings season is now underway and the results have been quite good so far, so that will likely to be the main driver going forward.

As you can see below, there were far more upgrades than downgrades this week. While it wouldn’t surprise me to see a small pickup in volatility, the consensus of the indicators for next week is clearly 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

  • Schwab clients: Contact a Trading Specialist at 800-435-9050 for questions or log in to the Schwab Learning Center. 

  • Not yet a client? Learn more about Schwab Trading Services