Trading | February 3, 2023

Weekly Trader's Outlook

Equities rally despite higher rates and a historically strong labor market.

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Weekly Market Review

Earnings Summary

The regular Q4 earnings season has reached its midpoint. This week 103 S&P 500 companies reported earnings and 74 of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 250 (50%) of companies in the S&P 500 have reported Q4 results so far. Below are the aggregate beat rates relative to the final results from recent quarters.

Quarter

EPS beats      

Rev beats

Q4 ‘22

70%

52%

Q3 '22

69%

59%

Q2 '22

75%

63%

Q1 '22

76%

67%

Q4 '21

76%

69%

Q3 '21

82%

68%

Q2 '21

86%

83%

Q1 '21

87%

72%

Q4 '20

78%

69%

Q3 '20

84%

74%

Q2 '20

85%

65%

Q1 '20

65%

59%

Average

80%

70%

From a growth standpoint, Q4 earnings are -3.8% y/o/y so far versus a -4.1% estimate when Q4 ended. Q4 revenues are +5.1% y/o/y so far versus a +3.8% estimate when Q4 ended. This compares to final growth rates of +3.8% and +11.5% respectively in Q3.

Economics Recap

Better (or higher) than expected

  • Employment Cost Index (ECI) for Q4: +1.0% vs. +1.1% est
  • JOLTS for Dec: 11.01M vs. 10.30M est
  • Initial (weekly) Jobless Claims: 183k vs. 201k est
  • Nonfarm Productivity for Q4: +3.0% vs. +2.5% est
  • Unit Labor Costs for Q4: +1.1% vs. +1.5% est
  • Nonfarm Payrolls for Jan: +517k vs. +188k est
  • Unemployment Rate for Jan: 3.4% vs. 3.6% est
  • Average Workweek for Jan: 34.7 vs. 34.3 est
  • Labor Force Participation Rate for Jan: 62.4% vs. 62.3% est
  • ISM Services Index for Jan: 55.2 vs. 50.5 est

On Target

  • Case-Shiller Home Price Index for Nov: +6.8% vs. +6.8% est
  • Average Hourly Earnings for Jan: +0.3% vs. +0.3% est

Worse (or lower) than expected

  • Chicago PMI for Jan: 44.3 vs. 45.4 est
  • Consumer Confidence for Dec: 107.1 vs. 108.1 est
  • ADP Employment Change for Jan: +106k vs. +170k est
  • Construction Spending for Dec: -0.4% vs. 0.0% est
  • ISM Manufacturing Index for Jan: 47.4 vs. 48.0 est
  • Factory Orders for Dec: +1.8% vs. +2.2% est
  • Underemployment Rate for Jan: 6.6% vs. 6.5% last month

This was a busy week for economic data as it included the reports on the January employment situation. Pre-market equity futures were lower on Friday morning (2/3) but then moved even lower when the reports were released. Nonfarm payrolls were so strong that perhaps they spooked the market into thinking the Fed could raise by +0.50% on 3/22. I still see that as a very low probability at this point.

At +517k, nonfarm payrolls were nearly 3x the estimate, and they were the largest single monthly gain since July 2022. The Unemployment Rate (pink line) fell back to a level that matched several months in 1969, but you’d have to go all the way back to October 1953 to find a lower level. The Labor Force Participation Rate (green line) ticked higher for the second consecutive month. If there was anything to be disappointed by it was the Underemployment Rate (blue line), which ticked higher after 2 monthly declines.     

5-year unemployment rate chart

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Market Performance YTD

While 2022 was a very defensive year, 2023 continues with its very cyclical bias so far. Here is the 2023 YTD (versus 2022 full-year) performance of the market broken down by the 11 market sectors (as of the close on 2/2/22):

 

2023 YTD

2022 Final

Category

1. Communications Svc

+23.6%

-40.4%

Cyclical

2. Consumer Disc

+20.8%

-37.6%

Cyclical

3. Info Tech

+14.9%

-28.9%

Cyclical

4. Real Estate

+13.1%

-28.5%

Cyclical

5. Materials

+9.4%

-14.1%

Cyclical

6. Financials

+6.9%

-12.4%

Cyclical

7. Industrials

+5.2%

-7.1%

Cyclical

8. Cons Staples

-1.2%

-3.2%

Defensive

9. Utilities

-1.7%

-1.4%

Defensive

10. Energy

-1.8%

+59.0%

Defensive

11. Healthcare

-2.2%

-3.6%

Defensive

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2023 YTD (versus 2022 full-year) performance of the major U.S. equity indices (as of the close on 2/2/22):

 

2023 YTD

2022 Final

Forward P/E Ratio /

S&P 500 (SPX)

+8.9%

-19.4%

18.8 / +0.4

Nasdaq Composite (COMPX)

+16.6%           

-33.1%

26.6 / +1.1

Dow Industrials (DJI)

+2.7%

-8.8%

17.9 / 0.0

Russell 2000 (RUT)

+13.6%

-21.6%

21.9 / +1.0

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Technicals

After the SPX finally broke through the long-term downtrend (orange line) on Monday 1/23, I mentioned that the SPX probably needed to close above 4,100 to signal the next uptrend. Not only did that occur on Wednesday (2/1) but on Thursday (2/2) the SPX also hit one of the most watched technical signals of all; the Golden Cross. This is where the 50-day SMA (yellow line) crosses up through the 200-day SMA (purple line); technical traders consider it bullish.  

And despite what appears to be a small pullback as I’m writing this (mid-day Friday 2/3), the new bull market target of 4,292 (+20%) now seems very much within reach; it is less than 4% away. While a small retracement back to 4,100 again wouldn’t be too surprising in the coming days, I suspect support at that level to be fairly strong.

6-month candlestick chart of the S&P 500 Index

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes

At the end of January, option volumes averaged a new all-time record-setting 46.1M contracts per day! That was above the final December level of 41.4M, and above the January 2022 level of 44.9M . November 2021 was the previous all-time monthly record at 45.2M 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 15% of all equity options are traded:

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

  • VIX call OI was +6.3%                     
  • VIX put OI was +7.1%                      

Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. 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 +2.4%         
  • SPX put OI was +1.5%                      

While SPX volume tends to be mostly institutional hedging, these changes reflect a 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, etc.) for the past week I observed the following:

  • ETP call OI was +4.7%                     
  • ETP put OI was +6.4%                      

The aggregate changes in Exchange Traded Products options reflect a modest 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 +5.2%                  
  • Equity put OI was +5.4%                  

Equity volume tends to have a large retail component to it. These changes reflect an insignificant bias toward the put side, so I see the Equity OI Change as neutral for the market in the near-term.

Open Interest Participation

Index OI Participation is +21.1% versus 2022 levels, so I see it as bullish in the long-term.

Equity/ETF OI Participation is +3.5% versus 2022 levels, so I see it as neutral in the long-term.

Open Interest Put/Call Ratios (OIPCR)

The VIX OIPCR is down 1 tick to 0.31 versus 0.32 last week. While this ratio tends to move in the same direction as the VIX index, this very small downtick isn’t too surprising given the VIX has gained only +0.22 points (+1.2%) over the last 4 sessions. Thus, it probably still implies that traders feel the VIX is likely to remain about where it is in the near-term. Therefore, I see the VIX OIPCR as neutral in the very near-term for the markets. This ratio is now little changed YTD, and it is well below the 200-day SMA of 0.38. Therefore, I see it as neutral in the long-term for the markets.

The SPX OIPCR is up 2 ticks to 1.81 versus 1.79 last week. This ratio tends to move in the same direction as the SPX, so this uptick is consistent with the SPX which was +109.20 points (+2.7%) over the last 4 sessions. As a result, it implies that SPX option traders (who are almost entirely institutional) have moderately increased their hedges this week and may be expecting either a pause or even a slight pullback in the SPX in the near-term. Therefore, I see the SPX OIPCR as moderately bearish in the near-term for the market. This ratio has been trending modestly higher for about 4 weeks now and it remains above the 200-day SMA of 1.73. I see it as moderately bearish in the long-term.

The normally very stable Equity OIPCR is down 1 tick to 0.94 versus 0.95 last week. This ratio is now well above the yearly low of 0.76 reached in mid-December and even above the high of 0.87 reached in mid-August of last year. At this level it implies that equity option traders (which includes a lot of retail traders) have been very slow to replace many of the long-term call options that expired at the standard January expiration; which implies a more defensive posture.   At this level I see the Equity OIPCR as moderately bearish in the near-term for the market. This ratio is now well above the 200-day SMA (currently 0.82), so I see it as moderately bearish in the long-term.

Cboe Volume Put/Call Ratios (VPCR)

The Cboe VIX VPCR has been moderately bearish (<0.40) all week. The 0.29 level on Thursday (2/2) was moderately bearish but the current reading of 0.41 as I'm writing this (mid-day Friday 2/3) is neutral. Since intraday levels tend to decline as the day goes on, I see it as moderately bearish in the very near-term.

The Cboe SPX VPCR has moved from neutral (1.60>1.30) to moderately bullish (<1.30) this week. The 1.28 reading on Thursday (2/2) was moderately bullish, and the current reading of 1.34 as I'm writing this (mid-day Friday 2/3) is neutral. Since intraday levels tend 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 1.32 versus 1.30 last week, it is neutral in the long-term.

The Cboe Equity VPCR has been mostly moderately bullish (<0.60) this week. The 0.49 reading on Thursday (2/2) was moderately bullish but the current reading of 0.69 as I'm writing this (mid-day Friday 2/3) is neutral. Since intraday levels tend 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 0.56 versus 0.63 last week, it is moderately bullish in the long-term.

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 neutral (1.10>0.90) this week. As a result, I see it as neutral in the near-term. It has also been neutral in 11 of the last 19 sessions, so I see it as neutral in the long-term.

The OCC Equity VPCR has been all over the map this week. As a result, I see it as volatile in the very near-term. With a 5-day average of 0.79 versus 0.85 last week, I see it as a moderately bullish in the long-term.

Volatility

Cboe Volatility Index (VIX)

After studying and analyzing the VIX for the past 30 years, I have found that it generally falls into the following 4 zones:

  1. Above 40 – Panic Zone
  1. 30 to 40 – High Anxiety Zone
  1. 20 to 30 – Elevated Uncertainty Zone
  1. Below 20 – Normal Zone

At the time of this writing (mid-day Friday 2/3), the VIX is -0.32 to 18.41. That is solidly in Zone 1. The last time the VIX closed above 20 was 1/19/23. This is still the only bear market in which the VIX has not (yet) touched or closed in Zone 4.

At its current level, the VIX is implying intraday moves in the SPX of about 40 points per day (this was 39 last week). The 20-day historical volatility is 79% this week versus 76% last week. The VIX is now more than 16 points below where it was in mid-October. And while it is even below its long-term average (19.74), it is still well above its long-term mode (12.42) which is the most common level of volatility.

With a top-to-bottom range this week of 3.38 points, I see the VIX as moderately bullish in the very near-term for the equity markets. At the time of this writing (mid-day Friday 2/3) the VIX is only about a point above a 13-month low, so I see it as still moderately bullish in the long-term for now.

On a week-over-week basis, VIX call prices have risen while VIX put prices have fallen. As a result, at +113 versus +18 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is quite a bit higher, and in this range I see it as neutral in the very near-term. Over about the past 3 weeks, VIX call prices have trended mostly higher, while VIX put prices have also trended mostly sideways. As a result, 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 time of this writing (mid-day Friday 2/3) the nearest VIX futures contract (which expires on 2/8) was trading at 19.25; nearly a point above the spot VIX level of 18.41. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 18.88; less than a half point above the spot price.

With an adjusted level that is less than a half point above the spot price, futures traders are indicating that they believe the VIX is likely to remain relatively 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 18.92 and 18.35 respectively. With the RPAPs of the further-dated contracts both also very close to the spot VIX, 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 a little higher this week, the VIX Hedging Effectiveness remains Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing at least some sensitivity to market volatility, and may be at least somewhat effective as hedging tools in the very near-term. VIX Hedging Effectiveness is 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.

Cryptocurrencies

Last week Friday (1/27) President Biden’s National Economic Council (NEC) issued a Roadmap to Mitigate Cryptocurrencies’ Risks. The primary goals were “to ensure that cryptocurrencies cannot undermine financial stability, to protect investors, and to hold bad actors accountable”. The roadmap calls on Congress to pass legislation that would prevent misuses of customers’ assets, mitigate conflicts of interest, strengthen transparency and disclosure requirements, and strengthen penalties for violating illicit-finance rules. The NEC also encouraged the adoption of steps previously issued by the Financial Stability Oversight Council (FSOC), recommended for stablecoin risk mitigation.  

The statement encourages Congress not to allow mainstream institutions and pension funds to delve into cryptocurrency markets; calling it “a grave mistake” to enact any legislation that deepens the ties between cryptocurrencies and the broader financial system. The NEC says it supports responsible technological innovations that make financial services cheaper, faster, safer, and more accessible, but only if they can be offered with commensurate safeguards.

For Schwab's perspective on cryptocurrencies, please visit: www.schwab.com/cryptocurrency

Economic reports for next week

Mon 2/6

None

Tue 2/7

International Trade (Trade Balance) for DecThis 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.

Consumer Credit for Dec – This measure of consumer debt is a lagging indicator that rarely affects the markets. This report covers auto loans, credit card debt and other personal debt.

Wed 2/8

Wholesale Inventories for Dec – This report covers manufacturing inventory data, so it is not a good indicator of consumer activity, but it may have ramifications on future GDP levels.

Thu 2/9

Initial Jobless Claims - For the week ending 1/28/23, claims were down 3k after being down 6k the prior week. The 4-week moving average now stands at 192k, down 5k from the prior week.

Fri 2/10

University of Michigan Consumer Sentiment for Feb – The first (Preliminary) report; usually released around the midpoint of the current month. This report is a collection of data on consumer attitudes and expectations, intended to predict discretionary spending.

Treasury Budget for Jan - 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.

Interest Rates

As expected, the Fed hiked interest rates +0.25% on Wednesday (2/1) and despite no real hint of dovishness, equities and bonds both rallied. The interest rate on the 10-year U.S. treasury ($TNX) began the week around 3.55%, fell modestly until the rate hike, and then fell sharply afterwards. Then when the January payrolls were released it shot back up. It is currently around 3.52% at the time of this writing (mid-day Friday 2/3).

Outlook

Despite a nearly 9% gain in little more than a month, equities have given back very little despite historical labor market strength. With earnings season rather mixed and few economic reports on the calendar, the indicators point to a week of likely consolidation ahead.

Bottom Line

Apparently after massive tax-loss harvesting in December, cash-heavy traders found Communication Services, Consumer Discretionary, and Technology stocks priced 30% or more lower than where they were a year ago, just too tempting to pass up. But with a gain of +8.9% YTD, including +2.7% this past week (through Thursday 2/2), equities may have gone just a little too far, a little too fast.

With earnings season now past the midpoint and 6 weeks until the next rate hike, a bit of consolidation, if not small profit taking would not be surprising here. As you can see below, there were more upgrades than downgrades, and that shifts the overall balance back to Neutral for next week.

Composite table of the market sentiment indicators for this week

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.

Except as noted in certain sections, Short-Term implies about a week, and Long-Term implies about a month.

Issue Number: 677

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