Week of Jan 10 2021

Market Wrap

As of @January 8, 2021

Narratives

With control of the House, Senate, and White House, we expect Democrats to pass further fiscal stimulus totaling about $750 billion by as early as mid-February. The notion that more stimulus will boost disposable income may however be a misnomer. State restrictions to control the virus will probably remain tight in Q1, and many households are likely to continue to cautiously avoid high-contact consumer services - Goldman Sachs

The results out of the Peach State prompted market participants to price in more stimulus, most obviously in rates. 10-year yields were the story. At the highs Friday, benchmark US yields rose above 1.12%. Meanwhile, Brent breached $55 and has logged just one weekly loss since October. This is another manifestation of the reflation trade. Crude is ignoring, for now anyway, the prospect of a less friendly backdrop for fossil fuels under Biden.

Nothing would choke off the reflation trade faster than a sustained dollar rally and/or a surge in US real yields, which the Fed has succeeded in pushing to record lows. The clock is at least ticking on dollar debasement as a viable contributor to the dollar-bearish narrative. We are wary of definitively calling the end of the dollar downtrend, but at the same time, the direction of travel in real yields could lend support - JPMC.

Of the nearly half-million jobs lost in leisure and hospitality last month, 372,000 came in restaurants and bars. This will continue to be a concern as long as the US fails to contain the spread of the virus. The number of permanent job losers declined by 348,000 to 3.4 million in December, but is up by 2.1 million since February - headed in the right direction, but it’s far too early to celebrate.

Week Ahead

The coronavirus situation around the globe will continue to dominate the headlines, as the number of infections continues to rise at record pace and several countries go back into lockdown. Elsewhere, the ECB will publish its monetary policy meeting minutes; while other important releases include US inflation data, retail sales and industrial output; UK monthly GDP; China inflation data and foreign trade; Germany 2020 full-year GDP figures; India industrial output and inflation data; and Japan current account and machinery orders.

‣

America

‣

Europe

‣

Asia

Earnings

During the fourth quarter, analysts increased earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q4 for all the companies in the index) increased by 2.3% (to $36.93 from $36.10) during the quarter - FactSet

In a typical quarter, analysts usually reduce earnings estimates during the quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.5%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.2%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 5.2%.

Thus, while analysts usually lower EPS estimates during a quarter, they increased EPS estimates during Q4 2020. In fact, the fourth quarter marked the second straight quarter and just the fourth quarter since Q4 2010 in which the bottom-up EPS estimate increased during the quarter. However, it should be noted that analysts made substantial cuts to EPS estimates for Q4 during the second and third quarters (March 31 to September 30). During this period, the Q4 bottom-up EPS estimate declined by 17.4% (to $36.10 from $43.73).

At the sector level, six sectors recorded an increase in their bottom-up EPS estimate during Q4, led by the Financials (to $8.08 from $6.82), Materials (to $4.48 from $4.14), and Communication Services (to $2.20 from $2.06) sectors. Five sectors recorded a decline in their bottom-up estimate during Q4, led by the Energy (to $0.17 from $0.60) sector.

As the bottom-up EPS estimate for the index increased during the quarter, the value of the S&P 500 also increased during this same period. From September 30 through December 31, the value of the index increased by 11.7% (to 3756.07 from 3363.00). The fourth quarter marked just the third time in the past 20 quarters (five years) in which both the bottom-up EPS estimate for the index and the value of the index increased during the quarter.

Metric	This Week	Prior Week	Change	Comments
Forward 12-mo Estimate	167.58	159.02	8.560000000000002	New 4-quarter period is now Q1 ’21 through Q4 ’21 or calendar 2021.
Forward 12-mo PE	23	23.6	-0.6000000000000014
Earnings Yield	4.38	4.23	0.14999999999999947	The sequential increase in EPS being greater than the S&P 500 rally this week
2y Combined Average Growth Rate %	3	3	0

‣

FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - January 1TFU relative to December with a strong position of close.

Weekly Timeframe (Full Session) - Outside (reversal) week with constructive position of close. Three clear volume distributions.

240m Bars (Full-session, Composite Profile 8-weeks) - A short-covering rally appears to have followed the Monday liquidation break that preceded the Georgia election uncertainty. 3775.00 is the clear pivot in the coming week, and this coincides with the rising 3d VWAP. Notice the spring formation that ensued on Friday's near-exact retest of 3775.

Bull vs Bear

Bulls will seek to maintain price acceptance above 3775, and ideally above 3800. The ITF trend remains intact above 3700 with TR 3584 - 3996.75 continuing to serve as the reference range.

Bears will seek to ideally break and hold below 3747.00 (-1.85%) on a closing basis to signal a sign of weakness. ITF trend cessation on close below 3700.00 (-3.08%).

‣

Last Week's Bull vs Bear

Indicators

‣

Positioning

‣

Sentiment

‣

Optix

‣

Volatility

‣

Breadth

‣

Disclaimer

‣

Sources