Trading | June 18, 2021

Weekly Trader’s Outlook

Hawkish Fed spooks equity and bond markets.

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

Q2 earnings season will begin in about 4 weeks, after which I will begin to update these numbers. With N/A (0%) 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 ‘20           N/A%                N/A%

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%

Q4 ’17              78%                  76%     

Q3 ’17              78%                  68%     

Q2 ‘17              77%                  69%

Q1 ’17              78%                  63%

Average           78%                  65%

From a growth standpoint, Q2 earnings are currently expected to be +62% y/o/y. Q2 revenue is expected to be +20% y/o/y. This compares to +50.2% and +10.9% respectively in all of Q1. Below are some of the higher-profile companies that reported earnings this week.  

Earnings Recap

Symbol            Actual  Estimate

ORCL               1.54      1.31

LEN                  2.65      2.37

KR                    1.19      0.94

ADBE              3.03      2.82                             

Economics Recap

Better (or higher) than expected:

  • Industrial Production for May: +0.8% vs. +0.7% est
  • Capacity Utilization for May: 75.2% vs. 75.1% est
  • Export Prices for May: +2.2% vs. +0.8% est
  • Import Prices for May: +1.1% vs. +0.8% est

On Target:

  • Leading Indicators for May: +1.3% vs. +1.3% est

Worse (or lower) than expected:

  • Retail Sales for May: -1.3% vs. -0.8% est
  • Producer Price Index (PPI) for May: +0.8% vs. +0.5% est
  • Core PPI for May: +0.7% vs. +0.5% est
  • NAHB Housing Market Index for Jun: 81 vs. 83 est
  • Business Inventories for Apr: -0.2% vs. -0.1% est
  • Housing Starts for May: 1,572k vs. 1,630k est
  • Building Permits for May: 1,681k vs. 1,730k est
  • Initial (weekly) Jobless Claims: 412k vs. 360k est

This was a moderate week for economic data. At 412k, Initial Jobless Claims came in above the 360k estimate and above last week’s 375k level. This was the first uptick since 4/24, though claims have been below 500k for 6 straight weeks now. Claims are now averaging 394k for the past 4 weeks. Aggregate initial jobless claims over the past 66 weeks (since the virus hit) now exceed 88M. Continuing claims, which have been steadily declining for the past 15 months, still exceed 3.5M (was 1.7M pre-virus).

Missing media item.

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 6/17/21):

                                                      2021 YTD                     2020 Final                     Category

  1. Energy                                      +41.1%                         -37.3%                          Defensive
  2. Real Estate                               +23.0%                         -5.2%                            Cyclical
  3. Financials                                 +22.1%                         -4.1%                            Cyclical
  4. Communications Svc             +17.6%                         +22.2%                         Defensive
  5. Industrials                                 +13.5%                         +9.0%                           Cyclical
  6. Materials                                   +12.7%                         +18.1%                         Cyclical
  7. Healthcare                                +9.9%                           +11.4%                         Defensive
  8. Info Tech                                   +9.8%                           +42.2%                         Cyclical
  9. Consumer Disc                         +7.0%                           +32.1%                         Cyclical
  10. Utilities                                     +4.1%                           -2.8%                            Defensive
  11. Cons Staples                            +3.1%                           +7.6%                           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 6/17/21):

                                                            2021 YTD                     2020 Final

  • S&P 500 (SPX)                            +12.4%                         +16.3%
  • Nasdaq Composite (COMPX)   +9.9%                           +43.7%
  • Dow Industrials (DJI)                 +10.5%                         +7.2%
  • Russell 2000 (RUT)                    +15.8%                         +18.4%

Technicals

The VIX has been above last Friday’s closing level all week, and with a top-to-bottom range of nearly 5 points, there is little doubt the “more volatility” part of last week’s forecast was on the mark. However, with the SPX down more than 33 points through Thursday (6/17) it wasn’t exactly neutral overall.

As I’m writing this (mid-day Friday 6/18) the SPX is down an additional 36 points (-0.8%) so the slow descent continues. Since the SPX did hit a new high on Monday (6/14) before the current pullback began, 4,255 is now the upside resistance level. To the downside, you can see that it is currently testing near-term support at the 50-day SMA (currently 4,182). If that fails, it’s a long way down (-4.5%) to the intraday low from 5/19 (4,062).

Missing media item.

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

2009-10 Roadmap

As I mentioned last week, with the current SPX still more than 23 percentage points above the 2010 Roadmap, it has lost most of its relevance. However, it is interesting that the current (rather small) downturn is happening just about the same time as the 3rd down wave in 2010 happened. I still see very little chance of this pullback getting anywhere close to correction territory, though I will continue to cover this topic until at least early July. I also think the 4,500 year-end target, which I have shown since early May, still makes sense.

Missing media item.

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Option Volumes:

The recent resurgence of the so-called “meme stocks”, combined with the monthly (and quarter-end) option expiration this week, has resulted in activity that has remained very high. June volume is now averaging 40.7M contracts per day. That is well above the final May level of 36.1M contracts per day and also well above the June 2020 level of 31.5M 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 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 -26.6%             
  • VIX put OI was -32.6%              

These sharp declines are due to the regular monthly (and quarterly) options expiration on Wednesday (6/16), so the VIX OI Change is N/A 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 +2.6%
  • SPX put OI was +4.2%             

These changes reflect a small bias toward the put side, so I see the SPX OI Change as moderately bearish 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 +3.7%             
  • ETP put OI was +3.3%            

These changes reflect an insignificant bias toward the call 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 +2.8%                      
  • Equity put OI was +2.7%                       

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 -5% versus 2020 levels, so I see it as neutral in the long-term.

Equity/ETF OI Participation is +28% versus 2020 levels, so I see it as bullish in the long-term.

With more than 450M contracts outstanding, equity/ETF open interest is at an all-time high. That means this will be the largest option expiration in history.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is down 2 ticks to 0.64 versus 0.66 last week. At this time, VIX options traders are holding (long or short) 64 puts for every 100 calls. This ratio tends to move in the same direction as the VIX index, so this slightly lower reading is somewhat surprising with the VIX index +1.36 (+8.3%) through Thursday (6/17). However, this is also being impacted by the monthly (and quarter-end) option expiration on Wednesday (6/16). At this level, this ratio is just above its lowest level in 4 weeks, so I see the VIX OIPCR as neutral in the very near-term for the markets. This ratio remains well below the 200-day SMA of 0.88, so I see it as moderately bearish in the long-term.

The SPX OIPCR is up 4 ticks to 2.21 versus 2.17 last week. This ratio tends to move in the same direction as the SPX, so this uptick is inconsistent with the direction of the SPX which has fallen 33.29 points (-0.8%) through Thursday (6/17). As a result, this likely indicates that SPX option traders (who are almost entirely institutional) have added hedges even as the SPX has pulled back a bit, and may be expecting further declines. While this ratio is a few ticks below its recent peak, it is still fairly high historically. As a result, I see the SPX OIPCR as moderately bearish in the near-term for the market. While this ratio is still below the level it reached before the Q1 2020 bear market, it remains well above the 200-day SMA of 2.02, so I see it as moderately bearish in the long-term.

The normally very stable Equity OIPCR is up 1 tick to 0.78 versus 0.77 last week. This ratio is no longer at an extreme low, and at this level it implies that equity option traders (which includes a lot of retail traders) are still bullish though slightly less so. Therefore, I see the Equity OIPCR as bullish in the near-term for the market. This ratio is now very close to the 200-day SMA of 0.79, so I see it as still moderately bullish in the long-term.

Cboe Volume Put/Call Ratios (VPCR):

The Cboe VIX VPCR has moved from neutral to moderately bullish this week. The 1.42 reading on Thursday (6/17) was moderately bullish and the current reading of 1.57 as I’m writing this (mid-day Friday 6/17) 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 been moderately bearish all week. The 1.86 reading on Thursday (6/17) was moderately bearish, but the current reading of 1.42 as I’m writing this (mid-day Friday 6/18) is neutral. 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 1.91 versus 1.90 last week, it is moderately bearish in the long-term.

The Cboe Equity VPCR has moved from an extreme low (<0.45) to bullish this week. The 0.49 reading on Thursday (6/17) was bullish, but the current reading of 0.66 as I’m writing this is neutral. 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 0.47 versus 0.41 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 been mostly bearish (>1.40) this week. As a result, I see it as bearish in the near-term. It has been both moderately bearish and bearish for most of the past 4 weeks, so I see it as moderately bearish in the long-term.

The OCC Equity VPCR has moved from an extreme low (<0.50) to bullish (<0.63) this week, so I see it as bullish in the near-term. With a 5-day average of 0.53 versus 0.46 last week, it is now also bullish in the long-term.

Volatility:

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 6/18), the VIX is up about 1½ points to 19.50. At its current level, the VIX is implying intraday moves in the SPX of about 42 points per day (this was 35 last week). The 20-day historical volatility is 94% this week versus 116% last week. The VIX is near 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 up several points from last week, I see the VIX as moderately bearish in the very near-term for the equity markets. However, the VIX is well below levels it hit in mid-May, so I see it as still moderately bullish in the long-term.

On a week-over-week basis, VIX call prices have fallen while VIX put prices have risen. At +57 versus +192 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is quite a bit lower, and at this level is back to neutral in the very near-term. Since the VIX IV Gap has been relatively high for about 4 weeks now, I see it as still moderately bearish 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 +3.70 versus +6.32 last week. This large decrease is mostly due to the June monthly contract expiration on Wednesday (6/16) which was replaced by the more expensive July contract.      

As of this writing (mid-day Friday 6/18) the nearest VIX futures contract (which expires on 6/23) was trading at 19.70; very close to the spot VIX level of 19.50. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 19.32; just below the spot price.

With an adjusted level that is only fractionally below the spot price, futures traders are indicating that they believe the VIX is likely to remain about where it is 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 18.80 and 18.73 respectively. With the RPAPs of the further-dated contracts both less than a point below 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 very near a 16-month low, the VIX Hedging Effectiveness is Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing only a small amount of sensitivity to market volatility, and may be only slightly effective as hedging tools in the very near-term. VIX Hedging Effectiveness is also 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

Perhaps as a result of a lack of attention recently, North Korean leader Kim Jong Un said this week, that he is ready for “both dialogue and confrontation” with the US, and that he would like to meet with President Biden. Japanese Prime Minister Yoshihide Suga visited the White House in April and South Korean President Moon Jae-in visited in May.

North America

Despite requests from citizens on both sides of the border, Canadian Prime Minister Justin Trudeau announced this week that he will extend the ban on non-essential travel between the US and Canada, until at least July 21. At the moment, new coronavirus deaths in the US are averaging about 400 per day, while vaccinations are averaging about 1M per day. This chart shows the trend in global deaths per day (white) and US deaths per day (blue).

Missing media item.

Source: Bloomberg L.P.

This chart shows the trend in global vaccinations per day (orange) and US vaccinations per day (purple).

Missing media item.

Source: Bloomberg L.P.

Europe

This week the European Union lifted its ban on non-essential travel from many countries. While short quarantine periods, virus testing and vaccine verifications will remain in place for some travelers to and from certain countries, this is an important step in the global reopening process.

Economic reports for next week:

Mon 6/21

None

Tue 6/22

Existing Home Sales for May – 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.

Wed 6/23

New Home Sales for May – This report measures sales activity of newly constructed homes and other single-family dwellings, and is generally considered less important than building permits since it is more of a trailing report.

Thu 6/24

Durable Goods Orders for May – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.

Initial Jobless Claims - For the week ending 6/12/11, claims were up 37k after being down 10k the prior week. The 4-week moving average now stands at 394k, down 8k from the prior week, but still well above the pre-pandemic level of 233k.

GDP for Q1 – This is the third estimate (Final) for Q1 and since this data is now 3 months old, any revision is likely to be ignored by the markets. You’ll recall that the second (Preliminary) report in Q1 showed +6.4%. 

Fri 6/25

Personal Income & Spending for MayThese reports use data from the monthly employment report to gauge income from wages and salaries. Personal income is also sometimes used to forecast future consumer spending.

Personal Consumption Expenditures (Core PCE) for May – PCE includes durable goods and nondurable goods which are directly influenced by the retail sales reports and services. This is the Fed’s preferred inflation gauge.

University of Michigan Consumer Sentiment for Jun – This is the Final report for June. At 86.4, the mid-month report was up from 82.9 in the prior month.

Interest Rates:

There was a regular scheduled FOMC meeting on Wednesday (6/16). In the post-meeting press conference, Fed Chair Jay Powell clarified that tapering was the next step for the Fed, because that logically has to happen before they start raising rates. He also said it was time to stop using the phrase “talking about talking about tapering”. It appears that tapering could begin before year-end and rate hikes could begin in 2023; likely late-2023 in my opinion, since it will take 3 or even 4 quarters to taper slowly enough not to disrupt the markets.

During Powell’s press conference, there was a rather sharp uptick in the interest rate on the 10-year Treasury Note ($TNX). The rate rose from about 1.49% to about 1.59% in only about 45 minutes, only to reverse sharply in the other direction the very next day. It remains very close to the original level (1.46%) at the time of this writing.

Outlook:

With wild swings in both the fixed income and equity markets this week, there is a lot of uncertainty about what the Fed believes and about when it may change its policy. This volatility and uncertainty looks like it will probably continue into next week.

Bottom Line:

With wild swings in both directions this week, there is no consensus on the overall direction the markets should be heading. As you can see below, the number of upgrades and downgrades was about equal this week and as a result, the net of the indicators is fairly well balanced again. That means the outlook for next week is Neutral again. While all of the indicators have moved away from bearish extremes, a fairly wide amount of disagreement still exists among them. With the market still trying to digest the commentary from the Fed and many of the FOMC members, it seems likely that next week will also remain Volatile.   

Missing media item.

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