Week of Feb 21 2021

Market Wrap

As of @February 19, 2021

Narratives

The US stock market has so far digested a surge in Treasury yields, but the body of evidence pointing to a swift uptick in inflation is growing. The US10YT=RR climbed to a one-year high of 1.36% this week, fueled by expectations that progress in the countrywide vaccination program and further fiscal stimulus would further spur economic growth. The rise in yields comes as the S&P 500 hovers at all time highs at the end of a fourth quarter earnings season that has seen companies overall report earnings 17.2% above expectations. The latest fund manager survey of BofA Global Research showed a record in the net percentage of investors taking higher than normal risk, cash allocations at their lowest level since March 2013 and allocations to stocks and commodities at their highest point in around a decade. While a move above 1.5% on the US10YT could spark an 8% drop in stocks, the steeper yield curve can also be interpreted as the bond market's way of signaling the economy is recovering and getting healthy - Nomura.

This was the week when rate rise seemed to give equities pause. One troubling characteristic of the last several days of selling in the Treasury market is the divergence with market-based inflation expectations. 10-year breakevens fell 11bp over the week, while 10-year nominal yields increased 14bp. For context, that’s effectively a quarter point hike in real rates - BMO

Gold rose with breakevens amid the rebound off last March’s panic, while reals were pushed inexorably (and mechanically) lower. But now, gold appears to have detached from real rates; spot is sitting near a seven month low. Gold (down -6% this year) struggles to compete with income-bearing investments when yields rise. One can also attribute some of gold's stumbles to Bitcoin; people are exchanging gold for BTC - Reuters

We feel the epic Jan-21 retail sales data is an absolute game changer, comparable to the hot early '94 NFP (that ended the early 90s jobless recovery and incited Fed rate hikes). Yes, there were two better monthly reads in 2020 but they came during the rebound from the lockdown plunge (hence outliers). The Jan print showed that stimulus checks are spent not saved - BofA

Week Ahead

The US is releasing the second estimate of Q4 GDP, alongside durable goods orders, personal income and outlays, and PCE price index. Other GDP updates to follow include those from Germany, France, Switzerland, India, Hong Kong and Mexico. Elsewhere, the Eurozone business survey and the UK jobs report will be keenly watched, as well as China house prices, Japan industrial production and retail sales, and Australia's fourth-quarter construction output. Central banks in South Korea and New Zealand will be deciding on monetary policy.

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America

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Europe

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Asia

Earnings

At least unofficially anyway, Q4 ’20’s earnings season is now over, with Walmart’s release of their fiscal Q4 ’21 earnings last Thursday morning. 400 of the SP 500 have now reported Q4 ’20 earnings per IBES data by Refinitiv. Overall, 83% of the companies in the S&P 500 have reported actual results for Q4 2020 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the five-year average of 74%. Bottom line is that sell-side analysts dramatically underestimated the ability of American companies to generate EPS and revenue growth with the pandemic, but are now pulling numbers higher as the quarter draws closer - FactSet

If 79% is the final percentage for the quarter, it will mark the third-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 14.6% above the estimates, which is also above the five-year average of 6.3%. If 14.6% is the final percentage for the quarter, it will mark the fourth-largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008. Due to these positive EPS surprises, the index is now reporting year-over-year growth in earnings of 3.2% today compared to an estimated year-over-year decline in earnings of -9.3% back on December 31

Companies that have reported positive earnings surprises for Q4 2020 have seen a decline in price of -0.1% on average two days before the earnings release through two days after the earnings release. This percentage decrease is well below the five-year average price increase of +0.9% during this same window for companies reporting positive earnings surprises.

If the final percentage for the quarter is -0.1%, it will mark the first time the index has seen an average decrease in price (over this four-day window) for S&P 500 companies reporting positive EPS surprises since Q4 2019 (-0.2%).

Why is the market not rewarding companies (on average) that have reported positive earnings surprises? It is likely not due to EPS guidance or analyst revisions to EPS estimates for the first quarter. To date, 63% (53 of 84) of the companies that have issued EPS guidance for Q1 have issued positive guidance. This percentage is well above the five-year average of 33%. In aggregate, analysts increased EPS estimates for Q1 by 3.5% during the month of January. This was the highest percentage increase in EPS estimates over the first month of a quarter since Q1 2018.

Metric	UpDn	This Week	Prior Week	Change	Comments
Forward 12-mo Estimate	🔵	173.68	173.65	0.030000000000001137	vs. @December 31, 2020 159.02
Forward 12-mo PE	🔴	22.5	22.6	-0.10000000000000142	vs. @December 31, 2020 23.6
Earnings Yield	🔵	4.45	4.42	0.03000000000000025	vs. @December 31, 2020 4.23%
2y Combined Average Growth Rate %	⚪️	5	5	0

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FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - February 1TFU relative to January, which confirms the LTF trend. Weaker position of close on the MTF this week, and notice the "cave fill" opportunity immediately below this week's settlement. Add to that the 3 single prints below the 3830 HVN; weak structure that is unlikely immune to eventual repair or escape the attention of short-term initiative sellers.

Weekly Timeframe (Full Session) - 1TFU configuration intact on WTF (combined with yet another closing ATH this week), despite lackluster follow-thru. Price retested the opposite end of the 2-week trading range and settled just below the unchanged weekly VPOCs. The proximity of the last two WLOs combined with a weak position of close could attract momentum sellers targeting a sustained 3900 break and 3800 retest.

Daily (Split Session) - Post February OPEX liquidation break commenced on Friday's RTH E-Period, resulting in a closing spike below 3904.75. Notice however that the force of selling was insufficient to pull the VPOC down. Sunday Globex will either confirm or reject the spike; the tendency favors continuation to follow (as Market Profilers interpret spikes as incomplete auctions).

240m Bars (Full-session, 9-weeks) - The breakout remains young (2-weeks) relative to the 6-week 200p TR that preceded it: TR 3662.50 → 3862.50 (End of Dec 20 → Jan 21). The last 2-weeks appear to be ITF consolidation above the 3862.25 breakout. 3862.25 also now coincides with the rising 20d MA, which will draw increased attention on retest. WLO 3880.50 is "weak" relative to WLO.1 3878.25, but notice the reduced wave volume (681k vs. 832k prior) indicative of short-term liquidation vs. more substantive selling. Carrying forward 3862.25 → 3878.25 (WLO.1) as a short-term pivot zone. The naked 01-31 VPOC.3 (3830.25) could be a logical train stop below a sustained break below 3900.

Bull vs Bear

This Week

Bulls will seek to hold above 3900 and ideally back above 3920. Change of condition scenario forms TR HI 3862.25 + 20d MA (-1.04%) on a closing basis.

Last Week

Bulls will seek to hold above 3900 and ideally above 3920. Change of condition scenario forms below WLO 3878.25 (-1.34%) on a closing basis.

Bears will seek to break and hold below 3862.25 (-1.04%) + 20d MA on a closing basis, and ideally below 3835.00 (-1.75%) to setup a 3800 (-2.64%) retest.

Bears will seek to break and hold below 3900 on a closing basis, and ideally close below the WLO 3878.25 (-1.34%).

Indicators

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Positioning

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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