Trading | April 16, 2021

Weekly Trader’s Outlook

Equities pause briefly, then proceed further into record territory.

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

The regular Q1 earnings season is now underway. With just 40 (8%) of the companies in the S&P 500 reporting results so far, 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 relatively early in the reporting season.

Quarter       EPS beats        Rev beats

Q1 ‘21            80%                  76%

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 +100.9% y/o/y; way above analysts’ expectation of +24.0%. Q1 revenue has been +7.4% y/o/y. 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

FAST                0.36      0.37

JPM                 4.50      3.01

BBBY               0.40      0.35

GS                   18.60    10.07

WFC                 1.05      0.68

UNH                5.31      4.40

PEP                 1.21      1.12

BAC                 0.86      0.65

USB                 1.45      0.96

RAD                 -0.78     -1.14

C                       3.62      2.48

DAL                 -3.55     -3.17

AA                    0.79      0.44

PPG                 1.88      1.56

PNC                 4.10      2.70

MS                   2.19      1.68                       

Economics Recap

Better (or higher) than expected:

  • Consumer Price Index (CPI) for Mar: +0.6% vs. +0.5% est
  • Core CPI for Mar: +0.3% vs. +0.2% est
  • Import Prices for Mar: +1.2% vs. +0.9% est
  • Export Prices for Mar: +2.1% vs. +1.0% est
  • Retail Sales for Mar: +9.8% vs. +5.8% est
  • Initial (weekly) Jobless Claims: 576k vs. 700k est
  • Housing Starts for Mar: 1739k vs. 1621k est
  • Building Permits for Mar: 1766k vs. 1750k est

On Target:

  • Business Inventories for Feb: +0.5% vs. +0.5% est

Worse (or lower) than expected:

  • Treasury Budget for Mar: -$659.6B vs. -$658.0B est
  • NFIB Small Business Optimism Index for Mar: 98.2 vs. 98.5 est
  • Industrial Production for Mar: +1.4% vs. +2.5% est
  • Capacity Utilization for Mar: 74.4% vs. 75.6% est
  • NAHB Housing Market Index for Apr: 83.0 vs. 84.0 est
  • University of Michigan Consumer Sentiment Index for Apr: 86.5 vs. 88.0 est

This was a rather heavy week for economic data. One report that needs some explanation was the March CPI which showed a large jump in inflation, but it's mostly due to what it's being compared to. Remember what began in March 2020; a virus-induced, government-mandated recession. At +2.6% y/o/y (yellow line) it appears to be a much larger increase than it really is. Notice that the longer-term trend (white line) has been fairly steady over the past 6 years. You need only look at the 10-year Treasury yield (discussed in the Interest Rates section below) to take comfort that this is no big deal. This exaggerated jump in prices will likely be ever greater in April when the economy was even more shut down.

CPI

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Additionally, at just 576k, Initial Jobless Claims came in well below the 700k estimate and below last week’s 769k level. This was the lowest single week for jobless claims since the pandemic began in March of last year, though it remains well above pre-virus levels. Claims are now averaging 683k for the past 4 weeks. Aggregate initial jobless claims over the past 56 weeks (since the virus hit) now exceed 84M. Continuing claims, which have been declining almost every week for the past 12 months, still exceed 3.7M (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 4/15/21):

                                                          2021 YTD                       2020 Final

  1. Energy                                      +28.7%                         -37.3%
  2. Financials                                 +19.1%                         -4.1%
  3. Industrials                                +13.9%                         +9.0%
  4. Communications Svc             +13.6%                         +22.2%
  5. Real Estate                               +13.1%                         -5.2%
  6. Materials                                   +12.6%                         +18.1%
  7. Info Tech                                   +9.9%                           +42.2%
  8. Consumer Disc                         +9.7%                           +32.1%
  9. Utilities                                     +6.3%                           -2.8%
  10. Healthcare                                +6.2%                           +11.4%
  11. Cons Staples                            +2.5%                           +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 4/15/21):

                                                            2021 YTD                     2020 Final

  • S&P 500 (SPX)                            +11.0%                         +16.3%
  • Nasdaq Composite (COMPX)   +8.9%                           +43.7%
  • Dow Industrials (DJI)                 +11.2%                         +7.2%
  • Russell 2000 (RUT)                    +14.2%                         +18.4%

Technicals

Not only did treasuries and equities look past any near-term inflation concerns this week; they rallied on it. As I’m writing this mid-day Friday (4/16) the SPX is +0.2%, and it looks like it will have closed at yet another new high by the time you read this. As you can see below, the last high of 4,170 occurred on Thursday (4/15). As I discuss in the Roadmap section below, equities could experience at least a modest pullback soon, but exactly what level will be reached in the meantime, is difficult to determine. On the downside, keep your eye on the 50-day SMA (currently 3,950) and then 3,850 which I believe is a potential support area in the event of a pullback. At that point (if not before) I would expect the dip buyers to step back in.

SPX

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

2009-10 Roadmap

As you can see below, the current SPX continues to sharply outperform the 2009-10 Roadmap. As I mentioned last week and above, pullbacks tend to be met with dip buyers fairly quickly. As a result, I believe a downturn to about 3,850 (-7% to -8%) is more likely than anything close to the 16% correction that occurred in 2010. The roadmap seems to imply a pullback could occur within the next 1½ to 2 weeks… or not.

Roadmap

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Option Volumes:

At mid-month, April volume is averaging 34.3M contracts per day. That is below the final March level of 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 +10.7%            
  • VIX put OI was +4.0%              

These changes reflect a strong 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 +3.7%
  • SPX put OI was +4.7%             

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 +3.0%             
  • ETP put OI was +3.7%             

These changes reflect a very 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 +3.9%                       

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.

OI Participation

Index OI Participation is -20% versus 2020 levels, so I see it as bearish in the long-term.

Equity/ETF OI Participation is +34% versus 2020 levels, so I see it as bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is down 5 ticks to 0.71 versus 0.76 last week. At this time, VIX options traders are holding (long or short) 71 puts for every 100 calls. Historically, this ratio tends to move in the same direction as the VIX index, but the fact that it is down so much this week is somewhat surprising given the VIX index was only -0.12 (-0.7%) through Thursday (4/15). However, the 16.57 close on Thursday (4/15) was a new 14-month low, so smaller moves are almost inevitable at this level. While this ratio spent much of September and October 2020 at lower levels, it likely implies that VIX option traders continue to get more and more concerned about a VIX spike in the near-term. Therefore, I see the VIX OIPCR as moderately bearish in the very near-term for the markets. This ratio remains well 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 3 ticks to 2.14 versus 2.11 last week. This ratio tends to move in the same direction as the SPX, so this move makes some sense given the SPX has risen 41.62 points (+1.0%) through Thursday (4/15). As a result, this small uptick likely indicates that SPX option traders (who are almost entirely institutional) are beginning to express some concern that the upside momentum in the SPX, could be running out of steam in the near-term. Therefore, I see the SPX OIPCR as moderately bearish in the near-term for the market. This ratio remains well above the 200-day SMA of 1.94, but still well below its level before the Q1 2020 bear market. I see it as neutral in the long-term.

The normally stable Equity OIPCR is down 1 tick to 0.74 versus 0.75 last week. This ratio has now been at an extreme low for over 3 months. At this level, it continues to indicate that many retail traders are not adequately protected against 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 moved from neutral to moderately bullish this week. The 1.40 reading on Thursday (4/15) was moderately bullish and the current reading of 1.41 as I’m writing this (mid-day Friday 4/15) is also moderately bullish. While these ratios tend to decline as the day goes on, I see it as moderately bullish in the very near-term.

The Cboe SPX VPCR has been both moderately bearish and neutral this week. The 1.38 reading on Thursday (4/15) was neutral and the current reading of 1.37 as I’m writing this (mid-day Friday 4/15) is also 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 1.56 versus 1.64 last week, it is now also neutral in the long-term.

The Cboe Equity VPCR has moved from a bullish extreme back to bullish this week. The 0.48 reading on Thursday (4/15) was bullish, and the current reading of 0.49 as I’m writing this is bullish. While 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 0.44 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 moderately bearish (>1.10) this week. As a result, I see it as moderately bearish in the near-term. It has also been moderately bearish in 8 of the last 11 sessions, 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 0.54 versus 0.54 last week, it is also bullish in the long-term.

Volatility:

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 4/16), the VIX is nearly unchanged around 16.50. At its current level, the VIX is implying intraday moves in the SPX of about 36 points per day (this was 36 last week). The 20-day historical volatility is 85% this week versus 98% last week. The VIX remains well below its long-term average (19.57) but above its long-term mode (12.42) which I consider to be “normal” volatility. With the VIX essentially at a 14-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.

On a week-over-week basis, VIX call prices are little changed and VIX put prices are also little changed. At +157 versus +161 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is little changed. As a contrarian indicator and still above +100, I see it as still moderately bearish in the very near-term. Since put prices have been trending very modestly lower for about 3 weeks now, I see the VIX IV Gap as now moderately bearish in the long-term too.

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 +7.20 versus +6.42 last week. This increase is mostly due to a modest drop in the price of the near-term contracts whereas the long-term contracts are little changed.      

As of this writing (mid-day Friday 4/15) the nearest VIX futures contract (which expires on 4/21) was trading at 17.05; about a half point above the spot VIX level of 16.52. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 16.77; barely above 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 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 18.53 and 19.04 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 just slightly this week, the VIX Hedging Effectiveness remains 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 provide adequate protection 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

This week China reported y/o/y Q1 GDP growth of +18.3%. While construction was a big component to that growth as usual, the greatest gains were made in consumer spending and household consumption; restaurants, jewelry, alcohol, and tobacco all showed very strong gains. By comparison, the most recent Atlanta Fed GDPNow estimate for Q1 GDP in the US (due on 4/29) is +8.3%; the NY Fed Nowcast predicts +6.1%.

North America

On Tuesday (4/13) the US Centers for Disease Control (CDC) and the Food and Drug Administration (FDA) recommended a (potentially temporary) halt of the Johnson & Johnson vaccine after 6 women (among 6.8M doses administered) developed rare but severe blood clots. This issue is similar to the one that resulted in a temporary halt of the AstraZeneca vaccine just a few weeks ago in Europe. In Europe, 222 cases of blood clotting occurred (among 34M doses administered); all in women under age 60. However, the AstraZeneca halt was lifted after minimum age restrictions were imposed, so similar action could be a possibility with the Johnson & Johnson vaccine too.

In the past week the US added more than 474k new coronavirus cases (versus 531k last week) and more than 4.8k new deaths (versus 8.0k last week). As you can see in the table below, COVID-19 cases worldwide now exceed 138M (versus 128M last week) of which the US accounts for over 31.4M or 23% (versus 24% last week) even though the US only accounts for about 4.3% of the world’s population. At >564k, the US accounts for 19% 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 213 new deaths (versus 269 last week). Germany added 1,662 new deaths (versus 1,399 last week). France added 2,786 new deaths (versus 1,648 last week).

Elsewhere

This week India added more than 6,200 new deaths (versus 1,700 last week). Brazil added more than 21,108 new deaths (versus 23,100 last week). Russia added more than 2,509 new deaths (versus 2,900 last week).

Economic reports for next week:

Mon 4/19

None

Tue 4/20

None

Wed 4/21

None

Thu 4/22

Initial Jobless Claims - For the week ending 4/10/21, claims were down 193k after being up 41k the prior week. The 4-week moving average now stands at 683k, down 51k from the prior week, but still well above the pre-pandemic level of 233k.

Existing Home Sales for March – 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 March – 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 4/23

New Home Sales for March – 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.

Interest Rates:

Despite higher than expected headline and core inflation results (CPI) in March, the interest rate on the 10-year Treasury Note slipped from 1.67% last week, to below 1.53% this week; its lowest level since March 11.

Outlook:

Equity markets remain buoyed by improving economics and stronger than expected earnings growth, despite very high earnings expectations. But the indicators point to a possible consolidation period next week before Q1 earnings season really ramps up

Bottom Line:

While I continue to have concerns that a modest pullback is possible now that earnings season has begun, there are no signs of one yet. In fact, despite very high earnings expectations, the market has generally held up well in the face of those that have already been released. Traders should remain cautious for at least the next few weeks as earnings releases increase. As you can see in the short-term column below, there were about an equal number of upgrades as downgrades this week and as a result, the indicators still 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.