Week of Nov 22 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

Minutes from the Federal Reserve and European Central Bank will be in the spotlight next week, while South Korea's policymakers meet to set interest rates. On the economic data front, the US is releasing the second estimate of Q3 GDP, alongside durable goods orders, personal income and outlays, and PCE price index. Other GDP updates to follow include those from Germany, France, Singapore, Taiwan and Mexico. Elsewhere, flash PMI surveys for the US, UK, Eurozone and Australia will be keenly watched, as well as the Eurozone business survey and China industrial profits.

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America

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Europe

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Asia

Narratives

Consensus is coalescing around 2021 being the year of vaccine not virus, reopening not lockdown, and recovery not recession, set against a macro backdrop of 5.2% global growth, 3.8% US GDP growth, 1.9% US inflation, and 1.2% on the US 10-year. The bank is sticking with the notion that credit and equities will likely top over the next few months given peak positioning, peak policy, and peak profits, but investor feedback unambiguously says “it’s too early to sell, let’s chat in spring." - Michael Hartnett, Bank of America

This month has been kind to equities despite election drama, disconcerting coronavirus news, and predictions that the US economy may contract in the first quarter, as containment protocols curtail activity. The equity flows data for November are impressive. The latest update from ICI on long-term mutual fund and ETF flows shows the largest weekly inflow in nearly four years (green in the figure, for the week of November 11) - Bloomberg

Steve Mnuchin came under intense scrutiny on Friday, after essentially demanding the Fed return funding that supports emergency facilities. A surprise termination of the Fed’s emergency liquidity programs, including the Main Street Lending Program, prematurely and unnecessarily ties the hands of the incoming administration, and closes the door on important liquidity options for businesses at a time when they need them most - US Chamber of Commerce

Thanks to the Fed, 2020 has been a year of record-shattering issuance for corporate borrowers, both investment grade and junk. High yield funds have had a few rough patches, but overall, it’s been smooth sailing with the Fed to thank. If one is concerned about the corporate bond market, consider that there is now a record level of $17 trillion of negative-yielding debt globally. If you’re looking for yield, the US high grade market comprises just 13% of the global IG fixed-income world, but pays out a record 40% of yield income - Bank of America US High Grade Team

Earnings

The S&P 500 is reporting a year-over-year decline in earnings of -6.3% for the third quarter. There are 63 industries within the S&P 500. Of these 63 industries, 27 are reporting a year-over-year decline in earnings for the third quarter. However, 36 are reporting year-over-year growth in earnings for the third quarter. The industries reporting the largest (year-over-year) dollar-level increases in earnings for the third quarter are the Interactive Media & Services (+$5.2 billion), Software (+$4.1 billion), and Automobiles (+$2.8 billion) industries.

The index is reporting a year-over-year decline in earnings because three industries are reporting unusually large year-over-year declines in earnings for the quarter. These three industries are the Oil, Gas, & Consumable Fuels industry, the Airlines industry, and the Hotels, Restaurants, & Leisure industry. All three industries have seen significant negative impacts to revenues and earnings due to COVID-19.

The Oil, Gas, & Consumable Fuels industry is reporting the largest (year-over-year) decline on a dollar-level basis (-$14.3 billion) and the third-largest (year-over-year) decline on a percentage basis (-113%) of all 63 industries. The Airlines industry is reporting the second-largest (year-over-year) decline on a dollar-level basis (-$13.0 billion) and the largest (year-over-year) decline on a percentage basis (-313%) of all 63 industries. The Hotels, Restaurants, & Leisure industry is reporting the third-largest (year-over-year) decline on a dollar-level basis (-$9.7 billion) and the second-largest (year-over-year) decline on a percentage basis (-133%) of all 63 industries.

These three industries are the largest contributors at the industry level to the year-over-year earnings decline for the S&P 500 as a whole. Combined, these three industries are reporting a larger decline in earnings (-$37.1 billion) than the aggregate earnings decline for the entire S&P 500 (-$22.7 billion). As a result, if these three industries were excluded, the S&P 500 would be reporting year-over-year growth in earnings of 4.3% instead of a year-over-year decline in earnings of -6.3%.

One sector that exemplifies the outsized impact on earnings growth of just one of these three industries is the Consumer Discretionary sector. Overall, the Consumer Discretionary sector is reporting a year-over-year decline in earnings of -4.2% for the third quarter. However, only three of the 10 industries in this sector are reporting a year-over-year decline in earnings, led by the Hotels, Restaurants, & Leisure industry. The other seven industries in this sector are reporting double-digit (year-over-year) earnings growth, led by the Automobiles (74%), Multiline Retail (65%), and Internet & Direct Marketing Retail (45%) industries. If the Hotels, Restaurants, & Leisure industry were excluded, the Consumer Discretionary sector would be reporting year-over-year earnings growth of 36.0% for the third quarter rather than a year-over-year decline in earnings of -4.2%.

Looking ahead to the fourth quarter, these three industries are again predicted to have the largest year-over-year declines in earnings on a dollar-level basis and on a percentage basis. These three industries are also expected to be the largest contributors to the year-over-year decline in earnings for the entire index for the quarter.

As of today, the S&P 500 is projected to report a year-over-year decline in earnings of -10.6% in the fourth quarter. If the Oil, Gas, & Consumable Fuels, Airlines, and Hotels, Restaurants, & Leisure industries were excluded, the estimated year-over-year decline for the S&P 500 for Q4 would decrease to -3.2% from -10.6%.

However, it is interesting to note that analysts believe all three industries will see year-over-year improvements in dollar-level earnings in 2021 relative to 2020. Because of the expected losses in 2020 for all three industries, year-over-year growth rates for 2021 can’t be calculated on a percentage basis. On a dollar-level basis, the Oil, Gas, & Consumable Fuels industry is projected to report a $24.9 billion year-over-year increase in earnings in 2021 relative to 2020. The Airlines industry is projected to report a $26.1 billion year-over-year increase in earnings in 2021 relative to 2020 (though the industry is still projected to report an overall loss in 2021). The Hotels, Restaurants, & Leisure industry is projected to report a $15.5 billion year-over-year increase in earnings in 2021 relative to 2020.

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Key Metrics & FactSet Charts

S&P 500 Futures

Monthly Profiles (Full Session) - November has re-established 1TFU on the Monthly Timeframe. The prior week settled just above the September High; last week retraced further down the VA and settled just above the October High. Will we see a deeper probe back into October, or will the LTF serve up a response? Despite Friday's liquidation, the LTF profile illustrates a "reversion to mean" for now.

Weekly Profiles (Full Session) - Last week we stated that price will be accepted or rejected above the reference TR (3506.50 → 3576.75). The market balanced from Monday → Wednesday and established WTF value (3608.00). This balance decisively broke to the downside late Wednesday, and then rebalanced Thursday → Friday between the TR Midpoint 3541.75 (also Axis Line) and the WIBL 3584.25. Notice the two distinct HVNs above, and Inside Week formation.

4hr Bars (Full-session, Composite 6-weeks) - TR 3506.50 → 3576.75 is highlighted above. The TR midpoint 3541.75, last week's Axis Line, was respected albeit likely weakened after 3 near-exact tests between Thursday and Friday's weak close. That said, it is premature to presume a breakout failure; but the absence of an excess low combined with a technical stopping point (October High) increases the odds of continuation to the downside; bears will target a 3500 retest. The 3500 -3600 TR was also supported by SPX options strikes that have been presumably loosened post Friday's OPEX. Friday's closing liquidation was notable but not overwhelmingly greater than Wednesday's with slightly less Ease of Movement

Friday NYSE Internals - 95,418 Down vs. Up Volume = -7% ratio.

Bull vs Bear

Bulls will seek to re-establish price acceptance back above 3600 (+1.29%). ITF bullish configuration above 3582.75 (+0.8%)

Bears will seek to retest and ideally break 3500 (-1.53%). ITF bearish configuration intact below the 3141.75 Axis Line 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