Week of Feb 07 2021

Market Wrap

As of @February 5, 2021

Narratives

The market’s attention to reflation trades — after seeing a lot of tactical profit-taking over the course of January — has exploded again in recent days. Five-year breakevens are near eight-year wides, cash 5s30s is the steepest since 2015, and heavy high-grade supply is pressuring the long-end. This has been driven by the first confirmation of a ‘whites of eyes’ inflation impulse in the US, after the monster ISM Manufacturing Price Index number this week, reflecting stronger demand, supply chain bottlenecks and what had been relative weakness in the dollar. In any event, thanks to realized vols calming down, the vol control background bid should help support the market. Further calm would see additional rebalancing into Equities from vol control - Charlie McElligott, Nomura

The discrepancy with ADP (which showed private employers adding 174,000 jobs in January) was rather glaring. Almost all of the gains from the NFP report were attributable to government hiring. Turning to structural damage — the dreaded “scarring” effect — permanent job losers rose last month after a sharp decline in December - BofA

Even as bankruptcies in the US surged to the highest in more than a decade last year, policy support prevented the kind of credit apocalypse that might have otherwise unfolded. In addition, the hunt for yield engendered by the same monetary accommodation drove investors out the risk curve and down the quality ladder, thereby forestalling creative destruction - SocGen

Markets are looking for reasons to take more risk. The GameStop saga came to an end and hopes that vaccines will work resurfaced. In the meantime, more relief money could feed the supply frenzy on both sides of the Atlantic, adding to the long-end steepening trend - SocGen

Week Ahead

As in the last week, investors will be paying attention to COVID-19 figures and the progress on a new US stimulus package. Important data releases include inflation for US, China and India; Q4 GDP figures for UK, Norway and Malaysia; consumer sentiment for US and Australia and industrial output and foreign trade for Germany. Also, central banks in Sweden, the Philippines, Mexico and Russia will be deciding on interest rates.

‣

America

‣

Europe

‣

Asia

Earnings

At this point in time, more S&P 500 companies are beating EPS estimates for the fourth quarter than average, and beating EPS estimates by a wider margin than average. As a result, the index is reporting higher earnings for the fourth quarter today relative to the end of last week and relative to the end of the quarter. Due to this increase in earnings, the index is now reporting year-over-year growth in earnings in Q4 2020 for the first time since Q4 2019. Analysts expect double-digit earnings growth for all four quarters of 2021. During the upcoming week, 77 S&P 500 companies (including three Dow 30 components) are scheduled to report results for the fourth quarter - FactSet

Overall, 59% of the companies in the S&P 500 have reported actual results for Q4 2020 to date. Of these companies, 81% have reported actual EPS above estimates, which is above the five-year average of 74%. If 81% is the final percentage for the quarter, it will tie the mark for the second-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting earnings that are 15.2% above the estimates, which is also above the five-year average of 6.3%. If 15.2% is the final percentage for the quarter, it will mark the third-largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008.

Due to the number and magnitude of these positive EPS surprises, the index is reporting higher earnings for the fourth quarter today relative to the end of last week and relative to the end of the quarter. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the fourth quarter is 1.7% today, compared to a year-over-year decline in earnings of -2.4% last week and a year-over-year decline in earnings of -9.3% at the end of the fourth quarter. Positive earnings surprises reported by companies in the Consumer Discretionary and Communication Services sectors were the top contributors to the improvement in overall earnings for the index during the past week. Positive earnings surprises reported by companies in the Financials, Information Technology, and Communication Services sectors have been the top contributors to the overall increase in earnings since the end of the fourth quarter.

If 1.7% is the actual growth rate for the quarter, it will mark the first time the index has reported year-over-year earnings growth since Q4 2019 (0.8%), and it will mark the highest year-over-year earnings growth reported by the index since Q4 2018 (13.2%). Seven sectors are reporting year-over-year earnings growth, led by the Financials, Materials, Information Technology, and Health Care sectors. Four sectors are reporting a year-over-year decline in earnings, led by the Energy and Industrials sectors.

Due to the number and magnitude of these revenue surprises, the blended revenue growth rate for the fourth quarter is higher now relative to the end of last week and relative to the end of the fourth quarter. As of today, the S&P 500 is reporting year-over-year growth in revenues of 2.7%, compared to year-over-year growth in revenues of 1.6% last week and year-over-year growth in earnings of 0.1% at the end of the fourth quarter. Positive revenue surprises reported by companies in the Communication Services, Health Care, and Financials sectors were the largest contributors to the increase in overall revenues for the index over the past week. Positive revenue surprises reported by companies in the Information Technology, Financials, and Communication Services sectors have been the largest contributors to the increase in the overall revenues for the index since the end of the fourth quarter.

If 2.7% is the actual growth rate for the quarter, it will mark the first time the index has reported year-over-year revenue growth since Q1 2020 (0.8%), and it will mark the highest year-over-year revenue growth reported by the index since Q4 2019 (3.4%). Eight sectors are reporting year-over-year growth in revenues, led by the Heath Care, Information Technology, Consumer Discretionary, and Communication Services sectors. Three sectors are reporting a year-over-year decline in revenues, led by the Energy and Industrials sectors.

Metric	This Week	Prior Week	Change	Comments
Forward 12-mo Estimate	173.12	171.33	1.789999999999992	This is essentially measuring the calendar 2021 SP 500 estimate since it measures Q1 ’21 – Q4 ’21.
Forward 12-mo PE	22.4	21.6	0.7999999999999972
Earnings Yield	4.45	4.61	-0.16000000000000014	Surprising given the jump in the EPS estimate although the SP 500 rallied over 4% too.
2y Combined Average Growth Rate %	5	4.5	0.5

‣

FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - February 1TFU relative to January. Notice 4-mo consecutive upward value migration as well as substantial volume cluster at 3800 (January POC).

Weekly Timeframe (Full Session) - Third consecutive Outside Bar printed, resulting in restart of 1TFU on WTF and strong position of close - but with 6 TPO distributions (single prints) left behind (as well as poor weekly high, indicative of unfinished business above).

1d Bars (Full-session, Composite Profile from Mar '20 Low) - It's a good time to zoom out on the daily bars; these are full session daily prints. Notice the two prominent reversals, each catalyzed by macro risk-on (November post-election, and last week reflation trade restart). Chartists will place a demand line beneath these pivots.

1d Bars (RTH, Composite Profile from Mar '20 Low) - Here above are the cash-session prints that encompass the same time horizon. Notice the trail of gaps left behind, a common feature of breakouts. The market has no obligation to fill gaps, but they certainly attract their share of initiative short sellers. Look carefully and notice the number of gaps that have been repaired nevertheless (many but not all); a common feature of back & filling. Chartists will take notice of the positive tilt on the upper Bollinger Band (trend confirmation).

P&F 5x3 (Full Session, Composite Profile 6-weeks) - The breakout is young, but the new ITF trend configuration remains intact above 3821.75 → 3835.75. Bearish change of condition on break 6-week HVN, which also coincides with heavy gamma strikes.

Bull vs Bear

Bulls will seek hold above 3821.75 → 3835.75 and ideally sustain momentum for a test of 3900s. Change of condition below the Gamma Volatility Trigger 3785.00 (-2.45%) on a closing basis.

Bears will seek to break and hold below 3821.75 on a closing basis, and ideally close below the Gamma Volatility Trigger (3785.00) and the 02-01 gap at 3777.00 (-2.66%).

‣

Last Week's Bull vs Bear

Indicators

‣

Positioning

‣

Sentiment

‣

Optix

‣

Volatility

‣

Breadth

‣

Disclaimer

‣

Sources