Week of Feb 28 2021

Market Wrap

As of @February 26, 2021

Narratives

One problem for risk assets is that the bond selloff is now being led by real yields, and historically, equities digest rising inflation expectations more easily than rising real yields. A rapid rate rise is usually a problem, all constructive commentary notwithstanding. The recent change in yields has reached a magnitude that is usually a headwind for stocks. Equities typically fall 1% during months when nominal rates jump by more than two standard deviations. When real yields rise by a comparable magnitude, stocks tend to fall 5% - David Kostin, Goldman Sachs

The reals are miles below levels that prompted the mini-bear market in late 2018 (except for the 30-year, they’re still deeply negative), but the swiftness with which they’ve recently risen is potentially destabilizing. The S&P trades with a forward multiple that ranks in the 99th percentile (exceeded only during the dot-com boom), but the equity risk premium implied by our DDM model ranks in just the 28th percentile (70bp above the historical average) - GS

It’s not just equities. Gold is struggling, Bitcoin fell nearly 20% last week and you can expect emerging markets to have problems too in the event US real rates continue to push higher. That said, better economic growth would generally be consistent with higher bond yields. Investors must balance the appeal of promising businesses with the risk that rates rise further and the recent rotation continues - GS

While myriad data suggests the US recovery is proceeding apace, the labor market remains hobbled, and especially services sector employment. Until services sector jobs return, the economy as a whole will find it difficult to sustain a recovery. The relevance of the jobs data for the bond selloff is questionable. For now, stocks appear wary, although content to hold off any larger correction for the time being - BMO

Week Ahead

After President Biden's $1.9 trillion pandemic aid bill narrowly passed the House in the early hours of Saturday, all attention would move now to vote in Senate. Meanwhile, investors will also turn the eyes to US jobs report due Friday; GDP data for Australia, Brazil, Canada and Turkey as well as worldwide manufacturing and services PMI surveys and monetary policy action by the Reserve Bank of Australia.

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America

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Europe

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Asia

Earnings

During the first two months of the first quarter, analysts increased earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q1 for all the companies in the index) has increased by 5.0% (to $39.50 from $37.61) during this period - FactSet

During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.5%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.2%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.8%. Thus, while analysts typically lower EPS estimates during the first two months of a quarter, they increased EPS estimates during the first two months of Q1 2021.

In fact, the first quarter marked the second-highest increase in the bottom-up EPS estimate during the first two months of a quarter since FactSet began tracking this metric in Q2 2002, trailing only the 5.7% increase during the first two months of Q1 2018. However, it should be noted that analysts made substantial cuts to EPS estimates for Q1 2021 during the first half of 2020 (December 31 to June 30). During this time, the Q1 bottom-up EPS estimate declined by 16.5% (to 37.40 from $44.78).

At the sector level, seven sectors recorded an increase in their bottom-up EPS estimate for Q1 during the first two months of the quarter, led by the Energy (+86%) and Financials (+11%) sectors. Four sectors recorded a decline in their bottom-up EPS estimate for Q1 during the first two months of the quarter, led by the Industrials (-14%) sector.

As the bottom-up EPS estimate for the index increased during the first two months of the quarter, the value of the S&P 500 also increased during this same period. From December 31 through February 25, the value of the index increased by 2.0% (to 3829.34 from 3756.07). If the price of the index does not close below 3756.07 today, the first quarter will mark the fifth time in the past 20 quarters (5 years) in which both the bottom-up EPS estimate for the index and the value of the index increased during the first two months of a quarter - FactSet

Metric	UpDn	This Week	Prior Week	Comments
Forward 12-mo Estimate	🔵	174.19	173.68	vs. @December 31, 2020 159.02
Forward 12-mo PE	🔴	21.9	22.5	vs. @December 31, 2020 26x
Earnings Yield	🔵	4.57	4.45	vs. @December 31, 2020 4.23%
2y Combined Average Growth Rate %	⚪️	5	5

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FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - February closed 1TFU relative to January, which confirms the LTF trend. Weaker position of close on the MTF coincided with a retest of the January VPOC. The back & filling opportunity highlighted last week proceeded to the extent of repairing only 1 of 3 single prints below the 3830 HVN. Nothing out of the ordinary and notice the steadily rising VPOC.

Weekly Timeframe (Full Session) - Cessation of 1TFU on WTF confirms a stall on the Intermediate Timeframe (ITF). For now, the price action is more indicative of overdue back & filling and a Secondary Test of TR 3662.25 → 3862.50. Moreover, Month-end rebalancing also factored into last week's "Rising Yields" catalyst.

Daily (Split Session) - Another closing spike below 3812.50 despite not exceeding B-Period (PLO, WLO 3785.00). Spike rules are back in effect; Sunday Globex will either confirm or reject the spike. The tendency favors continuation, which more importantly would trigger continuation of 1TFD on the WTF. Bulls will aim to at minimum print an Inside Week.

240m Bars (Full-session, 9-weeks) - TR 3662.50 → 3862.50 (End of Dec 20 → Jan 21) continues to serve as our larger timeframe reference range. The 2-week consolidation above clearly broke down and the ES retested the upper quadrant of our 200p TR. The notable upthrust on Thursday at 3934.50 (coinciding with the bond rout) will likely be marked as a “lower high pivot” by the chartists. Last week, we highlighted that the then naked 01-31 VPOC.3 (3830.25) could be a logical train stop below a sustained break below 3900; and we can clearly see the clustering of price action in that neighborhood, hence being carried forward as this week's Axis Line. Though it is premature to declare breakout failure, the lackluster follow-through (2-weeks prior) combined with the size of the reference range and poor structure below creates a potential pathway for retesting 2021 lows (-4.01%). That said, selling Effort vs Reward reflected by the notable peak in downward wave volume( Pane 3) vs distance traveled suggests the market could just as easily begin to churn and form another TR; 150 handles between 3785.00 → 3934.50 provides a more than sufficient field of play for either scenario. Also of note, no significant excess at the ATHs.

Bull vs Bear

This Week

Bulls will seek to hold above 3785.00 and ideally back above the Axis Line 3835.00. ITF trend reinstatement will require a break and hold above 3862.25 (+1.39%).

Last 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.

Bears will seek to break and hold below 3757.50 (-1.36%) on a closing basis, and ideally below 3747.75 (-1.63%) to create the condition for eventually retesting 2021 low (-4.11%).

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.

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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Credits