Week of Dec 13 2020

Market Wrap

Asset classes 12/11/20

Narratives

Flow dynamics are crucial and arguably becoming more important than ever. The current dealer long Gamma vs spot dynamic is pinning markets. Absence of a worst-case post-election scenario forced a spectacular vomiting of crash-hedges, which were unwound into the market in the days and weeks that followed with endless supply of implied volatility - Charlie McElligott, Normura

Liquidity used to be one of the key drivers of the markets, the tide that lifts all boats; not anymore. In the past the two series tracked each other closely, but that relationship has either fallen apart or is undergoing a structural shift. It took an unprecedented increase in liquidity in 2020 to stabilize risk, and the apparent ‘overshoot’ was necessary to help the banking system and ease government borrowing costs and catalyze more extensive fiscal injection - Deutsche Bank

Flow dynamics are keeping equities pinned, and vol-control funds have re-leveraged to the tune of some $30 billion over the past two weeks as trailing realized moved lower. The absence of a worst-case post-election scenario has forced a spectacular vomiting of ‘crash’ hedges, which were force-unwound into the market in the days and weeks that followed with endless supply of implied volatility - Nomura

It would take an ideological reckoning of epic proportions for economists and central bankers to admit that while direct monetary financing and cash handouts might sound insane, the current conjuncture is even more ludicrous; as evidenced by myriad distortions across financial assets (e.g., $18 trillion in negative-yielding debt globally), absurd wealth concentration (e.g., Elon Musk making $129 billion on paper over the course of just 11 months). We see heightened odds of a stagflation-looking trade thematic - Nomura

Week Ahead

Central banks in the US, Japan and the UK will be deciding on monetary policy in the coming week, while flash PMI surveys for the US, UK, Eurozone, Japan and Australia will give an insight about the state of the global economic recovery. Other important releases to follow include US and China industrial output and retail sales; Canada and UK inflation data and retail trade; Japan's tankan survey and inflation; Australia employment figures; and India consumer and wholesale prices.

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America

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Europe

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Asia

Earnings

The estimated (year-over-year) earnings decline for the S&P 500 for CY 2020 is -13.7%, which is below the 10-year average (annual) earnings growth rate of 10.0%. If -13.7% is the actual decline for the year, it will mark the largest annual earnings decline reported by the index since CY 2008 (-25.5%). The unusually large decrease in earnings can be attributed to the negative impact of COVID-19 on a number of industries in the index - FactSet

Metric	This Week	Prior Week	Change	Comments
Forward 12-mo Estimate	160.66	160.4	0.2599999999999909	Rose again this week
Forward 12-mo PE	22.8	23	-0.1999999999999993	Still salty given the expected “average” SP 500 EPS growth rate for calendar 2020 and 2021 is 4%.
Earnings Yield	4.39	4.34	0.04999999999999982	First sequential increase in the SP 500 earnings yield since the month of October, probably due -1% decline on the week
2y Combined Average Growth Rate %	4	3	1	Average over last 6 months

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FactSet Charts

S&P 500 Futures

Monthly Profiles (Full Session) - December remains (and will likely remain) 1TFU relative to November given the post-election volatility decline. Notice above that that monthly VAs are being retested and respected.

Weekly Profiles (Full Session) - A new absolute high printed during ETH this week (3714.75); odds favor a retest during RTH down the road. Notice that a 1TFU configuration has been maintained for 6 consecutive weeks. Recall our criteria for short-term bullish configuration: Closing above the WHI.2, 3655.50, -1.16%. This week closed just below at 3653.50.

Spit-session Daily Profiles - Notice that Friday's "Neutral Day" structure left behind both a poor high and poor low. That said, directional short-term traders are mindful of Wednesday's single prints above.

P&F 5x3 (Full-session, Composite 4-weeks) - Pane 2 highlights short-term back & filling that covered into Friday's close, but not before closing the most recent 12/01 Gap (3632.50, -1.77%). FOMC, Dec OPEX, and TSLA S&P addition in the coming week.

Bull vs Bear

Bulls will seek to break and maintain price acceptance above last Friday's RTH HI 3657.75 and ideally 3670.25 (+0.46%) on a closing basis. Failing that, bulls will seek to confine the downside to a secondary test of the WLO (3620.75, -0.9%).

Bears will seek to break and hold below last Friday's RTH LO 3624.50 and ideally extend range below the WLO (3620.75, -0.9%) on a closing basis. Continued downside momentum would likely build the cause to retest 3600 (-1.46%).

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Last Week's Bull vs Bear

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