Week of Jan 03 2021

Market Wrap

As of @December 31, 2020

Narratives

Unfortunately, the pandemic necessitated policy accommodation at the expense of exacerbating a number of undesirable side effects - Jonathan Golub, Credit Suisse

The pandemic accelerated existing trends in markets, just as it did in society. A look at the growth/value disparity shows that while the trajectory has perhaps leveled off, 2020 was the year the ratio went parabolic. And those trends fed on one another, sometimes to deleterious effect. November’s outperformance for laggards like value and small-caps was just the product of four ‘good news’ days around vaccine readouts and Janet Yellen optimism vs. a change of rally composition.

With central banks hell-bent to ensure liquidity, deeply negative real rates in the US eliminated the opportunity cost of gold, and for those who actually believe central banks will, in fact, be successful in engineering inflation. Gold boasted its best return in a decade, but the rally is essentially an inverse yields play. Deeply negative real rates are also stimulative for risk assets; especially to the extent they serve to push the dollar lower.

The housing market is arguably overheating in America, and recent data suggests the bubble is already starting to buckle. Existing home sales fell in November for the first time in six months, the latest numbers showed, while new home sales dropped 11%. While supply is recovering, the market is still very tight, and that’s driven prices sharply higher. As a result of these dynamics, would-be buyers now need to spend around a third of their wages to afford a house.

Week Ahead

All eyes turn to the Federal Reserve's meeting minutes next week, as well as the US jobs report due Friday, which will probably point to a further slowdown in the labor market recovery. Other key releases include US ISM PMI surveys and foreign trade; UK monetary indicators; Eurozone retail sales, industrial output, and inflation rate; China Caixin PMI surveys; Japan consumer confidence; Singapore Q1 GDP figures; and worldwide manufacturing and services PMI surveys.

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America

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Europe

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Asia

Earnings

There are 10,361 ratings on stocks in the S&P 500. With the end of year approaching there are 53.6% are Buy ratings, 39.6% are Hold ratings, and 6.8% are Sell ratings. It is interesting to note that analysts are more optimistic on S&P 500 stocks today compared to the start of the 2020 (before the impact of COVID-19). On December 31, 50.6% of ratings on S&P 500 stocks were "Buy" ratings, compared to 53.6% today. Nine sectors have a higher percentage of Buy ratings today compared to the start of the year, led by the Utilities (to 51% from 42%) and Consumer Staples (to 47% from 39%) sectors. On the other hand, just two sectors have a lower percentage of Buy ratings today compared to the start of the year: Communication Services (to 55% from 60%) and Energy (to 62% from 66%) - FactSet

Metric	This Week	Prior Week	Change
Forward 12-mo Estimate	159.02	159.01	0.010000000000019327
Earnings Yield	4.29	4.29	0
Forward 12-mo PE	22	23.3	-1.3000000000000007
2y Combined Average Growth Rate %	3	3	0

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FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - December closed 1TFU relative to November with a continuing decline in volatility. Bullish configuration intact > December VAL ~3650.00.

Weekly Timeframe (Full Session) - The ES printed a cash-session poor high (no excess) on the last trading day of 2020, indicative of unfinished business above combined with a strong position of close. Back & filling and WLO retest risk below WMID 3714.50

240m Bars (Full-session, Composite Profile 8-weeks) - ITF Trading Ranges (TR) provided useful references throughout the 2020 recovery cycle. Notice the price action relative to the ~3600-3700 TR now 6-weeks back. First, a false breakout; Second a series of Secondary Tests resulting in a powerful upthrust that triggered responsive buying at 3600. This culminated in a breakaway gap last week and a strong position of close for 2020. A most remarkable year of price action by any measure. That said, 2020 also left 8 open gaps below, the most recent this past Monday; when a correction eventually materializes, it will be greeted with ample repairable structure below.

P&F 5x3 (Full Session, Composite Profile 4-weeks) - Notice the December Delta Divergence (Pane 2). LTF selling to laggard momentum buyers? The story will unfold as volume begins to return this week.

Bull vs Bear

Bulls will seek to maintain value above last week's breakaway gap, and ideally above the weekly pullback low, 3714.50. Incomplete auction high and strong position of close increases the odds of further upside - even if preceded by back and filling.

Bears will seek to contain momentum and ideally break and hold below 3738.25 on a closing basis. A Secondary Test of the Pullback LO (Confluence: WMID, WIBL, WHI.3 3714.50 -0.91%) and ideally breaking 3700 (-1.3%) would signal further downside potential.

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Last Week's Bull vs Bear

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