Week of Nov 01 2020

Market Wrap

Global Currencies - 5d

Global Equity Futures - 5d

US Treasury Yields v. Fed Funds Rate - 5d

Commodities Futures v CRB Index - 5d

‣

Last Week's Bull vs Bear

Week Ahead

The US presidential election takes center stage next week, with Joe Biden leading the polls and early voting hitting record levels amid the coronavirus crisis. Elsewhere, central banks in the US, UK, Australia and Malaysia will be deciding on monetary policy, while the third-quarter earnings season continues. Key economic data include US non-farm payrolls, ISM PMI surveys and foreign trade; Eurozone retail sales; Germany industrial output and factory orders; China Caixin PMIs and trade balance; and Indonesia Q3 GDP figures.

‣

America

‣

Europe

‣

Asia

Narratives

Everyone complains about an upside down world where the surest path to rising stock prices and better earnings outcomes are lower taxes, rising leverage, and trillions in share repurchases. But it seems like nobody on Wall Street or in the C-suite actually wants the situation to change. While it’s true that corporate tax hikes will exert a mechanical drag on earnings, a sane world would prefer a genuinely robust economic backdrop to a situation where bottom line beats have to be engineered through tax cuts and debt-funded buybacks - David Bianco, DWS

Selling begets selling into an illiquid market facilitating a vicious downward spiral. Equities options ‘Dealer Gamma vs Spot’ in both SPX and QQQ is significantly short now and keeps us lurching lower - Nomura

With high valuations comes a high bar. Sometimes the bar is set so high that it’s simply impossible to clear. If the GOP holds the Senate and then proceeds to prevent the passage of a big stimulus bill in the US, that would likely further weigh on growth expectations, thereby making it even more difficult for anything other than secular growth to perform - Nomura

The market doesn’t love the prospect of a Biden win given the read-through for punitive tax hikes and re-regulation. Nevertheless, investors are marginally at peace with it under the rationalization that an outright blue sweep would at least clear a path for a much-needed COVID stimulus program, as well as set the table for a multi-trillion dollar infrastructure plan - Nomura

Earnings

64% of the companies in the S&P 500 have reported actual results for Q3 2020 to date. Of these companies, 86% have reported actual EPS above estimates, which is well above the five-year average of 73%. If 86% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise 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 third quarter is smaller now relative to the end of last week and relative to the end of the third quarter. As of today, the S&P 500 is reporting a year-over-year decline in earnings of -9.8%, compared to a year-over-year decline in earnings of -16.6% last week and a year-over-year decline in earnings of -21.1% at the end of the third quarter. Positive earnings surprises reported by companies in multiple sectors (led by the Communication Services and Consumer Discretionary sectors) were responsible for the large decrease in the overall earnings decline during the past week.

If -9.8% is the actual decline for the quarter, it will mark the third largest year-over-year decline in earnings reported by the index since Q3 2009 (-15.8%), trailing only the previous two quarters. It will also mark the sixth time in the past seven quarters in which the index has reported a year-over-year decline in earnings. Four sectors are reporting year-over-year earnings growth, led by the Health Care sector. Seven sectors are reporting a year-over-year decline in earnings, led by the Energy, Industrials, and Consumer Discretionary sectors.

In terms of revenues, 81% of S&P 500 companies have reported actual revenues above estimates, which is above the five-year average of 61%. If 81% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive revenue surprise since FactSet began tracking this metric in 2008. The current record is 78%, which occurred in Q4 2017. In aggregate, companies are reporting revenues that are 2.9% above the estimates, which is also above the five-year average of 0.7%. If 2.9% 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. The current record is 2.2%, which occurred in Q4 2012.

Due to the number and magnitude of these revenue surprises, the blended revenue decline for the third quarter is smaller now relative to the end of last week and relative to the end of the third quarter. As of today, the S&P 500 is reporting a year-over-year decline in revenues of -2.1%, compared to a year-over-year decline in revenues of -3.0% last week and a year-over-year decline in earnings of -3.6% at the end of the third quarter. Positive revenue surprises reported by companies in multiple sectors (led by the Communication Services and Consumer Discretionary sectors) were responsible for the decrease in the overall revenue decline during the past week.

If -2.1% is the actual decline for the quarter, it will mark the first time the index has reported two consecutive quarters of year-over-year revenue declines since Q1 2016 and Q2 2016. Five sectors are reporting year-over-year growth in revenues, led by the Health Care sector. Six sectors are reporting a year-over-year decline in revenues, led by the Energy and Industrials sectors.

Looking at future quarters, analysts predict a (year-over-year) decline in earnings in the fourth quarter (-11.2%) of 2020. However, they are also project a return to earnings growth starting in Q1 2021 (14.5%).

‣

Key Metrics & FactSet Charts

S&P 500 Futures

Monthly Profiles (Full Session) - October maintained the Inside Month (OBIB formation) configuration, indicative of LTF balance despite the recent downside skew and increased volatility. Despite recent selling pressure, however, Monthly Value remains both above 3400 and the September VA.

Weekly Profiles (Full Session) - Last week's 4-day balance conclusively broke to the downside resulting in two consecutive weeks of declining value (and increased downside range). The retest of the September LO 3198.00 remains in play and appears likely.

4hr Bars (Full-session, 16-weeks) - Notice that 3198.00 (September '20 LO) was itself a Secondary Test of the 3190.25 → 3284.50 TR (16 weeks prior, adjacent left yellow-highlighted). This week's Delta Quadrant is 3119.00, the 13-October "spring" that propelled the index to its recovery high. Upcoming weekly quadrants have been expanded in anticipation of reduced liquidity / continued volatility during the election.

Friday RTH - Selling momentum gradually waned after the European Close on Friday with the final thrust coming in K-Period (142K Down Wave). A pleasant short-covering rally ensued into the close more than likely attributable to systematic flows.

Bull vs Bear

Bulls will seek to establish an interim TR (3225 → 3322.50) in order to contain further erosion in weekly value. LTF Bullish Change of Condition above 3424 (TR HI 3295.50 → 3424 +4.88%).

Bears will seek to break and hold the September LO 3198.00 and ideally 3190.25 (TR HI 3156.25 → 3190.25 ). Price acceptance below will bring 3156.25 (-3.32%) and 3100 risk (-5.05%) back into play.

Indicators

‣

Macro

‣

Sentiment

‣

Optix

‣

Volatility

‣

Breadth

‣

Disclaimer

‣

Sources