Week of Jan 31 2021

Market Wrap

As of @January 29, 2021

Narratives

On some measures, last week constituted the largest, most acute short squeeze in a quarter century. Besides being catalyzed by Reddit, this particular episode stands out for other reasons. For example, aggregate short interest is low. Coming into 2021, the median short interest for S&P 500 stocks was just 1.5% of market cap. That was on par with levels seen two decades ago, during the dot-com days - David Kostin, Goldman Sachs

Over the past three months a basket of 50 Russell 3000 stocks with market caps above $1 billion and the largest short interest as a share of float, posted a near 100% gain. That is better than the 77% return during the second quarter of last year, better than two similar rallies during the dot-com boom/bust, and far superior to a comparatively meager 56% surge as the bull market began to take root in 2009 - Goldman Sachs

Those with no high school education own no stocks; less than 1%. This wasn’t always the case. If last week truly was populism commandeering the stock market, it could be because, in over 40 years we still haven’t seen any political action to reverse the collapse in US real wages that has led people to need to speculate for a living. Manifestations of the gig economy (ex. Uber-driving) are amenable to the same analysis - Rabobank

We remain focused, however, on a trio of factors which argue that the outlook for equities remains firmly positive: Low positioning, the expected improvement in the pandemic as vaccines are rolled out (and herd immunity achieved), and the likely durability of monetary and fiscal support. We also take note of a near record spread between realized vol and the VIX. Realized vol has steadily moved lower helping to catalyze re-risking from vol-sensitive investor cohorts. - JPMorgan

Week Ahead

Next week, the US jobs report will provide an update on the labour market after seven consecutive months of job gains came to a shuddering halt in December. ISM PMIs will be in the spotlight and investors will also monitor the progress of stimulus discussions in Washington. The earnings season continues with quarterly results from Alphabet, Amazon and Pfizer. Elsewhere, traders will look at the OPEC+ meeting and monetary policy decisions from the BoE, RBA and RBI as well as GDP growth figures for the Euro Area.

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America

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Europe

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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. Despite the increase in earnings, the index is still reporting a year-over-year decline in earnings, mainly due to the negative impact of COVID-19 on a number of industries within the index. But, if earnings continue to surpass estimates at current levels, it is possible the index will report year-over-year earnings growth for the quarter for the first time since Q4 2019 - FactSet

Overall, 37% of the companies in the S&P 500 have reported actual results for Q4 2020 to date. Of these companies, 82% have reported actual EPS above estimates, which is above the five-year average of 74%. If 82% is the final percentage for the quarter, it will mark 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 13.6% above the estimates, which is also above the five-year average of 6.3%. If 13.6% 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 the number and magnitude of these positive EPS surprises, the blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the fourth quarter is smaller now relative to the end of last week and relative to the end of the quarter. As of today, the S&P 500 is reporting a year-over-year decline in earnings of -2.3%, compared to a year-over-year decline in earnings of -4.8% 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 Information Technology sector, partially offset by a negative earnings surprise reported by a company in the Industrials sector, were mainly responsible for the decrease in the overall earnings decline during the past week. Positive earnings surprises reported by companies in the Financials and Information Technology sectors, partially offset by a negative earnings surprise reported by a company in the Industrials sector, have been mainly responsible for the decrease in the overall earnings decline since the end of the fourth quarter.

If -2.3% is the actual decline for the quarter, it will mark the fourth straight quarter and the seventh time in the past eight quarters in which the index has reported a year-over-year decline in earnings. Five sectors are reporting year-over-year earnings growth, led by the Materials, Information Technology, and Financials sectors. Six sectors are reporting a year-over-year decline in earnings, led by the Energy, Industrials, and Consumer Discretionary sectors.

In terms of revenues, 76% of S&P 500 companies have reported actual revenues above estimates, which is above the five-year average of 62%. If 76% is the final percentage for the quarter, it will mark the fourth-highest percentage of S&P 500 companies reporting a positive revenue surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting revenues that are 3.2% above the estimates, which is also above the five-year average of 0.9%. If 3.2% is the final percentage for the quarter, it will mark the largest revenue surprise percentage reported by the index since FactSet began tracking this metric in 2008.

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 1.7%, compared to year-over-year growth in revenues of 0.8% 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 Information Technology sector were the largest contributor to the increase in the overall revenue growth rate during the past week. Positive revenue surprises reported by companies in the Information Technology and Financials sectors have been the largest contributors to the increase in the overall revenue growth rate 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 revenue growth since Q1 2020. Seven sectors are reporting year-over-year growth in revenues, led by the Information Technology, Health Care, and Consumer Discretionary sectors. Five 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	171.33	169.79	1.5400000000000205	New 4-quarter period is now Q1 ’21 through Q4 ’21 or calendar 2021.
Forward 12-mo PE	21.6	22.6	-1	After a 3.1% drop in the S&P 500 this week
Earnings Yield	4.61	4.42	0.1900000000000004	Highest since Oct 30th 4.8%. Sagging S&P 500 values are driving earning yields higher.
2y Combined Average Growth Rate %	4.5	3	1.5

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FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - January 1TFU relative to December despite unofficially posting a negative return, which has historically portended negatively for the S&P 500 in terms of full-year return. Notice that price settled just below the December VAH.

Weekly Timeframe (Full Session) - Second consecutive Outside Week, but with cessation of 1TFU and a weak position of close well below the weekly VA.

240m Bars (Full-session, Composite Profile 8-weeks) - This week's pullback resulted in a retest of our 2-month prior reference range (still highlighted in yellow above). Downside continuation into TR 3584 → 3696 on a closing basis could set up a retest of the midpoint or further. We will keenly watch the price action at 3652.50 should the selling pressure maintain. Notice that we have closed -3 standard deviations below the ITF regression line. The wave volumes (Pane 3) clearly depict the largest selling imbalance over the past 8 weeks.

P&F 5x3 (Full Session, Composite Profile 6-weeks) - Notice the back & filling (cave) below 3794.50 and 3693.00. The WLO 3685.50 presents an easily visible pivot for the coming week, which essentially ties to whether 3700 is defended or broken on the closing basis. The latter could easily lead to a retest of 3584 - 3600.

Bull vs Bear

Bulls will seek hold above 3700 and ideally 3732.75 on a closing basis. ITF Trend Configuration cessation below 3772.25.

Bears will seek to break and hold below 3700 and ideally below the WLO 3685.50 on a closing basis to signal downside 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