Week of Nov 15 2020

Market Wrap

US Treasury Yields v. Corporate Credit - 5d

Global Equity Futures - 5d

S&P 500 Sectors - 5d

Global Currencies - 5d

Commodities Futures v CRB Index - 5d

FAAMG - 5d

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Last Week's Bull vs Bear

Week Ahead

Investors will continue to monitor the spread and impact of the pandemic on the global economy while the third-quarter earnings season will come to a close. Elsewhere, central banks in China, Turkey, Hungary, Indonesia, Iceland, the Philippines and Thailand will be deciding on monetary policy. Key economic data include US retail sales and industrial production; UK and Eurozone consumer confidence and inflation; China unemployment, retail sales and industrial output; Japan Q3 GDP, trade balance and inflation; and Australia employment figures. Traders will also follow the G20 Virtual Leaders’ Summit.

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America

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Europe

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Asia

Narratives

If Democrats take control of the Senate after the January 5th Georgia runoff elections, our economists expect a larger fiscal package of about $2.5 trillion; the bank’s baseline expectation for stimulus in 2021 is just $1 trillion. Beyond the disparity between those figures, should Democrats somehow manage to prevail, markets would face a realization of the “blue wave” risk that was so readily priced out earlier this month - Goldman Sachs

The evolution of the political landscape in DC has undoubtedly slowed progress toward fiscal bailout 2.0 and, if anything, skewed the ultimate size of the deal toward the lower end of estimates. The obvious concern is the fallout from a fresh round of lockdowns on the labor market in the absence of new fiscal stimulus -BMO

Many investors have expressed concern that the extremely high current level of market concentration means that an effective vaccine would result in a lower US equity market. Goldman posits two scenarios: The first is that the FAAMG cohort goes nowhere in 2021. The second suggests FAAMG rises 5%, while the rest of the S&P 500 jumps 20%. That would put the overall gauge at 4,300 by year-end which coincides with the bank's 2021 target for the index - Goldman Sachs

When it comes to cataloguing risk factors, one thing that often goes unnoticed is liquidity, bearing in mind that market depth has never recovered from the February 2018 VIX ETN extinction event. Lackluster liquidity generally makes markets more vulnerable to fragility events, and the accompanying volatility triggers mechanical de-leveraging from vol-sensitive strats - Goldman Sachs

Earnings

There is a sharp difference in the price reactions for S&P 500 companies reporting positive EPS surprises before Election Day and after Election Day. Prior to Election Day (Sep. 10 to Nov. 2), 86% of S&P 500 companies reported a positive EPS surprise. These companies saw an average price decrease of -0.6% two days before the earnings release through two days after the earnings release. This percentage decrease is well below the five-year average price increase of +0.9%. Facebook is an example of a company that reported a positive EPS surprise of 42.8% ($2.71 vs. $1.90) before Election Day but witnessed a negative price reaction of -7.7% (to $261.36 from $283.29) over this four-day window.

To date, 84% of S&P 500 companies have reported a positive EPS surprise for Q3 2020. Overall, the market is rewarding these positive earnings surprises at average levels. Companies that have reported positive earnings surprises for Q3 2020 have seen an average price increase of +0.9% two days before the earnings release through two days after the earnings release. This percentage increase is equal to the five-year average price increase of +0.9% during this same window for companies reporting positive earnings surprises.

Including and after Election Day (Nov. 3 to Nov. 12), 78% of S&P 500 companies reported a positive EPS surprise. These companies saw an average price increase of +5.7% two days before the earnings release through two days after the earnings release. This percentage increase is well above the five-year average price increase of +0.9%. General Motors is an example of a company that reported a positive EPS surprise of 97.8% ($2.83 vs. $1.43) after Election Day and witnessed a positive price reaction of +10.2% (to $38.96 from $35.35) over this four-day window.

Although more S&P 500 companies beat EPS estimates (86% vs. 78%) prior to Election Day and beat EPS estimates by a wider median difference (+13.0% vs. +10.9%) prior to Election Day, the market punished positive EPS surprises before Election Day and rewarded positive EPS surprises more than average after Election Day. Thus, it appears the price movements for S&P 500 companies reporting positive EPS surprises were less related to earnings performance and more related to broader market themes such as the election (uncertainty before the election and more certainty after the election) and COVID-19 (rising cases before the election but news of potential vaccines after the election).

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Key Metrics & FactSet Charts

S&P 500 Futures

Monthly Profiles (Full Session) - 1TFU has been re-established on the Monthly Timeframe, owed to the remarkable "Monday overshoot". For the week, price settled just above the November VAH (and just below the September High), resulting in a new closing ATH. Notice the rising value in October and now November relative to September, indicative of rising price acceptance, now well back above the September low (LTF pullback/LIS).

Weekly Profiles (Full Session) - The pullback from the Monday overshoot resulted in a base, clearly evident on this week's "b-shaped" profile. Friday's late day price action (and spike) is an inconclusive auction and retest back above this base. Price will either be accepted or rejected above the reference TR, which is highlighted on the 4-hr chart below.

4hr Bars (Full-session, Composite 6-weeks) - TR 3506.50 → 3576.75 is highlighted above. We have seen numerous Spring Formations throughout 2020 result from Secondary Tests. Springs are indicative of Responsive LTF Buyers, which tend to "respond" to discount buying opportunities. Immediate continuation to the upside would conversely be indicative of Initiative Buying - predominantly from shorter timeframe participants. Responsive Selling will likely emerge en-route to a retest of the absolute ATH 3668.00 (printed during ETH, bias weak high). We operate under the guideline that Larger Timeframe Buyers & Sellers are generally responsive and moreover conduct their business principally thru shorter timeframe participants: LTF Buyers do business with STF Sellers and LTF Sellers do business with STF Buyers.

Friday RTH - The Intraday RTH Chart illustrates the non-directional chop that characterized most of Friday's market action until the closing initiative bid of M-Period. Notice the absorption of the 70k Down Wave in L-Period; the closest volume comparison was during B-Period (82k) indicative of declining Ease of Movement. Apart from the "L-Period Poor High" there was little foretelling of the M-Period 83k closing bid apart from market structure that provided no cause to responsively trade from the short side.

Bull vs Bear

Bulls will seek to maintain price acceptance above TR 3506.50 → 3576.75 and the build the cause to retest the absolute ATH 3668.00 (+2.4%). ITF bullish configuration intact above the Axis Line 3541.75.

Bears will seek to break TR 3506.50 → 3576.75 and retest the lower range of the TR and ideally 3500 in order to build momentum. ITF bearish configuration below 3506.50 (-2.1%) on a closing basis.

Indicators

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Macro

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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