Week of Dec 06 2020

Market Wrap

Equity Futures v. VIX - 5d

S&P 500 Sectors - 5d

FAAMG - 5d

Global Currencies - 5d

US Treasury Yields v. Corporate Credit - 5d

Commodities Futures v CRB Index - 5d

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Last Week's Bull vs Bear

Week Ahead

The coronavirus situation around the globe will continue to dominate the headlines, as well as negotiations on a post-Brexit trade deal. Elsewhere, monetary policy meetings in the Eurozone, Brazil and Canada will be keenly watched, as well as updated GDP figures for Japan, the Eurozone, the UK, Russia and South Africa. Other important releases include US and China inflation data; US and Australia consumer sentiment; UK and China foreign trade; Germany and India industrial output; and Japan current account and machinery orders.

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America

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Europe

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Asia

Narratives

A lackluster November jobs report helped cement market expectations for fresh fiscal stimulus, pushing equities and bond yields higher into the weekend. Ideally, the case has been cemented for WAM extension from the Fed this month, while simultaneously prodding Congress into passing the bipartisan $908 billion relief bill. It also bolsters the reflation narrative and presumably risk assets while reinforcing the pro-cyclical nature of the rally. At the same time, WAM extension and a good post-FOMC press conference performance from Jerome Powell can help insure against a disorderly rise in yields - Bloomberg

It’s going to be a challenge to see the market experience a ‘real’ near-term pull-back, at least until after December Op-Ex. We have a lot of ‘pinning’ flows, and peak ‘long Gamma vs spot' at current levels. Meaning, dealer hedging will tend to insulate the market from large swings - Nomura

There is lagging, mechanical “buy” impulse from the vol-control universe as realized grinds lower. This is a substantial upside catalyst, and the lagging-but-substantial re-leveraging flows from systematic ‘Vol Control’ strategies upping their Equities exposure in VWAP ‘latent-bid’ fashion is kicking in harder now. Nearly $14 billion (est.) have been added to S&P futures over the past two weeks - Nomura

It was the second straight week of declines for bonds. TLT had its worst week since early August. The risk in the market now is that as 10-year yields finally start catching up, we have a valuation reset because stocks are a long duration asset, particularly the US stock market - Morgan Stanley

Earnings

For 2021, the bottom-up EPS estimate (which reflects an aggregation of the median EPS estimates for CY 2021 for all of the companies in the index) is $169.20. If $169.20 is the final number for the year, it will mark a record-high EPS number for the index.

Over the past 20 years (2000 – 2019), the average difference between the bottom-up EPS estimate at the beginning of the year (December 31) and the final EPS number for that same year has been 7.0%. In other words, industry analysts on average have overestimated the final EPS number by 7.0% one year in advance. Analysts overestimated the final value (i.e. the final value finished below the estimate) in 13 of the 20 years and underestimated the final value (i.e. the final value finished above the estimate) in the other seven years.

If one applies the average overestimation of 7.0% to the current 2021 EPS estimate (assuming the estimate changes little between now and December 31), the final value for 2021 would be $157.32. If one applies the average overestimation of 1.9% (excluding the years 2001, 2008, and 2009) to the current 2021 EPS estimate, the final value for 2021 would be $165.92. Based on these estimates, EPS of $157.32 would not reflect a new record-high EPS number for the S&P 500 (it would be below the EPS reported in both CY 2018 and CY 2019) while EPS of $165.92 would reflect a new record-high EPS number for the S&P 500.

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Earnings Metrics & FactSet Charts

S&P 500 Futures

Monthly Profiles (Full Session) - The first week of December, including a new ATH, insures continuation of 1TFU. Notice that cessation of 1TFU has occurred but once (at the September '20 midpoint) since June '20.

Weekly Profiles (Full Session) - December's strong open included an exact test of 3700 on Friday (new intraday ATH and closing ATH). Bulls will ideally maintain control above last week's WMID (3646.25) and ideally above the prior week's high (WHI.1, 3655.00, -1.16%).

4hr Bars (Full-session, Composite 6-weeks) - Last week, we alluded that larger timeframe participants could zoom out and combine preceding multi-day balances into a composite "3-week Balance" (which in turn would represent a larger timeframe "bull flag"). The top of that 3-week range is, of course, the prior ATH, which coincides with the 3-day VWAP. Odds favor this level (3671.00, -0.73%) being retested. Below that, the weekly pullback low (3642.25, -1.51%) conveniently approximates to the WVAL. And finally, we have Monday's Gap #6 at 3632.50 (-1.77%), which triggers an air-pocket back to 3600 (-2.65%). These levels will be eyed by shorter timeframe positional traders, but as can be seen on Pane 2 & 3, accumulation has strengthened and implied volatility has weakened.

Friday RTH (0.25 x 5 P&F) - A new RTH ATH (3700.00) and closing ATH (3698.00) was printed on Friday. Selling pressure occurred both in J and L period, but was effectively absorbed, resulting in the prominent HVN and VPOC. Notice the extreme buying pressure and resulting "Spike" (unfinished business) that ensued into the M-period close (104k Wave Volume).

Bull vs Bear

Bulls will seek to maintain price acceptance above last week's pullback low (3642.25, Wednesday RTH LO). The strong position of close combined with Friday's spike formation is indicative of unfinished business above as opposed to a clear excess high.

Bears will seek to break and hold the weekly pullback low (3642.25, -1.51%) on a closing basis. This would build the cause to close Monday's Gap (3632.50, -1.77%) and retest the 20d MA (3606.25, -2.48%) reference. Options are heavily long calls; thus a definitive liquidation could exploit a plausible air-pocket.

Indicators

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Macro

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Sentiment

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Optix

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Volatility

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Breadth

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Disclaimer

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Sources