NYSE MAC Desk
Weekly Recap
STRAIGHT FROM THE TRADING FLOOR
by Michael Reinking, Sr. Market Strategist
November 24, 2021 5:00 PM ET
DOW 35,804 (-9), S&P 500 4,701 (+11), Russell 2000 2,331 (+4), NYSE FANG+ 7,802 (+76), ICE Brent Crude $82.18 /barrel (-$0.13), Gold $1,789/oz (+5), Bitcoin ~57.4k (-400)
MAC Desk Commentary:
Options expiration week has had a negative bias throughout the year with the S&P 500 ending lower in 8 of the last 10 months, by an average of 1%. The S&P was able to buck that trend ending the week up 0.3% and was within 1 point of a new all-time high earlier today. However, it doesn’t feel like there are a lot of high fives on trading desks as there was a clear bifurcation and narrowing of leadership within the market. One of the easiest ways to see that is to compare the equal-weight version of the index to the market-cap weighted and the former ended the week down -1.3% (underperforming mkt-cap weighted by 2% - by the way I did that without a calculator). The Dow Jones Industrial Average closed lower by 1.4% while the R2K underperformed for the second consecutive week closing lower by almost 3%. While the gains have been broad based since markets bottomed in October, tech has led to the upside and that accelerated this week. The negative Covid headlines coming out of Europe, which culminated with Austria announcing a new 20-day lockdown today, has caused investors to revert back to the old playbook. As it relates to the mega-cap tech stocks there are multiple factors at play but momentum, which may have been exacerbated by options expiration, accounts for least part of that. For the week AMZN, FB, TSLA, NVDA all ended up >5%. On the opposite end of the spectrum travel related stocks have been under pressure all week (JETS/AWAY down >5%). Other cyclical sectors got hit as well with energy and financials leading to the downside (XLE/XOP down >5% - XLF/KRE down ~2% WTD).
Outside of the news coming from Europe the news flow this week was actually pretty positive. Economic data continued to signal that the economy has been re-accelerating coming out of the summer with retail sales exceeding expectations and the regional surveys, which provide a first look at November data, also blowing away expectations. This should portend well for next week’s Markit PMIs. Retail earnings were the other major focus this week and broadly speaking the numbers have exceeded expectations. Management teams continue to highlight that demand is very strong and it has been impressive to see how well they have navigated this very difficult operating environment. The one area of debate has been around margins and in some cases, we’ve seen stocks selloff, as the companies have chosen to not fully pass along rising costs to the consumer. Earnings within the tech sector were mixed but semis have been a standout. The SOX index hit a new all-time high up ~3% for the week. There also continue to be some positive signals/commentary that the supply chain issues are improving on the margin though admittedly a new Covid wave could quickly put a stop to that.
Washington has remained busy. As expected, the virtual meeting between President Biden and Xi this week didn’t produce any major announcement. However, after the meeting China reported it was going to release some oil from reserves (after a Biden request) along with the joint statement on carbon last week signals a thawing of relations. After the CBO released its cost assessment last night the House passed the BBB bill today. The real work is still ahead to get this through the Senate. As it relates to Washington, from a market perspective the two risks at this point are the debt ceiling and the Fed leadership decision. On the former it appears that McConnell and Schumer are willing to work with each other so we can avoid a showdown like September. According to the White House Fed Chair Powell’s fate will be announced early next week.
I’ve been in the Powell will be re-appointed camp but must admit I am not feeling as strongly given how long this is taking and some of the signaling coming from Washington at this point. The PredictIt market is currently $0.67 Powell vs. $0.35 Brainard. Should Chair Powell not be reappointed I would expect some additional volatility, but it is unclear how much policy would really change. Brainard is perceived to be more dovish but her messaging has been in line with Powell’s commentary. She will definitely be viewed as less friendly for the banking sector. Keep in mind there are multiple appointments that the White House needs to make. If Brainard is not chosen for the Chair role I would expect her to be appointed to either replace Richard Clarida as Vice-Chair, whose term ends in Q1, or fill the vacant role of Vice-Chair of Supervision previously held by Randal Quarles.
Today, there was a somewhat significant development at least for Fed watching nerds, which I can no longer try to deny. This week we’ve heard from multiple Fed officials who sounded more cautious related to inflation and increased the probability of earlier rate increases. However, the big development was today’s trial balloon by Vice-Chair Clarida who said that depending on the data it “may very well be appropriate” to begin discussing whether to speed up the pace of the taper. Rates have been moving higher for most of the week but were down ~6bps across the curve following the European developments. However, after the Clarida comments the front end sold off sharply. 2yr +0.7bps (0.515%), 5yr -2bps (1.20%), 10yr -5.3bps (1.535%), 30yr -6.5bps (1.905%).
The Technicals Still Matter
After five consecutive weeks of gains, we’ve now seen the S&P essentially trade sideways for the last two weeks. This is positive in that we’ve worked off some of the short-term overbought conditions though you can argue that the leadership has gotten even more extended while the laggards have only gotten weaker. This could make the S&P susceptible to a mean reversion trade. The range in the S&P was very tight this week ~1%. The two very short-term levels I’m watching are this week’s low (~4,670) and the 20d which has now caught up to price (~4,650).
Clearly the set up in the Dow is different as it broke the 20d this week and is now pulling back into the area it broke out from in mid-October where we should start to see some support ~35.5k. The 50d is ~35.2k.
This week oil broke down from its recent range ~80 - ~86 and the 50d moving average ~80.50. A move lower to ~74/75 looks reasonable which would be a test of the 100d and the area we broke out from in September.
VIX not giving a great read. We didn’t see signs of real “stress” today though there is some anxiety. Outside of the Europe situation the Fed uncertainty is likely weighing on investor minds. It looks like we could get a push higher, but if we get a Powell renomination, I think we would get a vol crush which might be all that is needed to kick off the Santa Rally. I don’t necessarily buy into the world is going to shut down again trade.
There was follow through to the USD breakout this week. If this continues it will ultimately lead to conversations about another headwind for multinational earnings but may help the inflation picture if commodities start to react.
The 10yr tested the upper end of the recent range this week before pulling back.
MAC Desk Commentary:
Options expiration week has had a negative bias throughout the year with the S&P 500 ending lower in 8 of the last 10 months, by an average of 1%. The S&P was able to buck that trend ending the week up 0.3% and was within 1 point of a new all-time high earlier today. However, it doesn’t feel like there are a lot of high fives on trading desks as there was a clear bifurcation and narrowing of leadership within the market. One of the easiest ways to see that is to compare the equal-weight version of the index to the market-cap weighted and the former ended the week down -1.3% (underperforming mkt-cap weighted by 2% - by the way I did that without a calculator). The Dow Jones Industrial Average closed lower by 1.4% while the R2K underperformed for the second consecutive week closing lower by almost 3%. While the gains have been broad based since markets bottomed in October, tech has led to the upside and that accelerated this week. The negative Covid headlines coming out of Europe, which culminated with Austria announcing a new 20-day lockdown today, has caused investors to revert back to the old playbook. As it relates to the mega-cap tech stocks there are multiple factors at play but momentum, which may have been exacerbated by options expiration, accounts for least part of that. For the week AMZN, FB, TSLA, NVDA all ended up >5%. On the opposite end of the spectrum travel related stocks have been under pressure all week (JETS/AWAY down >5%). Other cyclical sectors got hit as well with energy and financials leading to the downside (XLE/XOP down >5% - XLF/KRE down ~2% WTD).
Outside of the news coming from Europe the news flow this week was actually pretty positive. Economic data continued to signal that the economy has been re-accelerating coming out of the summer with retail sales exceeding expectations and the regional surveys, which provide a first look at November data, also blowing away expectations. This should portend well for next week’s Markit PMIs. Retail earnings were the other major focus this week and broadly speaking the numbers have exceeded expectations. Management teams continue to highlight that demand is very strong and it has been impressive to see how well they have navigated this very difficult operating environment. The one area of debate has been around margins and in some cases, we’ve seen stocks selloff, as the companies have chosen to not fully pass along rising costs to the consumer. Earnings within the tech sector were mixed but semis have been a standout. The SOX index hit a new all-time high up ~3% for the week. There also continue to be some positive signals/commentary that the supply chain issues are improving on the margin though admittedly a new Covid wave could quickly put a stop to that.
Washington has remained busy. As expected, the virtual meeting between President Biden and Xi this week didn’t produce any major announcement. However, after the meeting China reported it was going to release some oil from reserves (after a Biden request) along with the joint statement on carbon last week signals a thawing of relations. After the CBO released its cost assessment last night the House passed the BBB bill today. The real work is still ahead to get this through the Senate. As it relates to Washington, from a market perspective the two risks at this point are the debt ceiling and the Fed leadership decision. On the former it appears that McConnell and Schumer are willing to work with each other so we can avoid a showdown like September. According to the White House Fed Chair Powell’s fate will be announced early next week.
I’ve been in the Powell will be re-appointed camp but must admit I am not feeling as strongly given how long this is taking and some of the signaling coming from Washington at this point. The PredictIt market is currently $0.67 Powell vs. $0.35 Brainard. Should Chair Powell not be reappointed I would expect some additional volatility, but it is unclear how much policy would really change. Brainard is perceived to be more dovish but her messaging has been in line with Powell’s commentary. She will definitely be viewed as less friendly for the banking sector. Keep in mind there are multiple appointments that the White House needs to make. If Brainard is not chosen for the Chair role I would expect her to be appointed to either replace Richard Clarida as Vice-Chair, whose term ends in Q1, or fill the vacant role of Vice-Chair of Supervision previously held by Randal Quarles.
Today, there was a somewhat significant development at least for Fed watching nerds, which I can no longer try to deny. This week we’ve heard from multiple Fed officials who sounded more cautious related to inflation and increased the probability of earlier rate increases. However, the big development was today’s trial balloon by Vice-Chair Clarida who said that depending on the data it “may very well be appropriate” to begin discussing whether to speed up the pace of the taper. Rates have been moving higher for most of the week but were down ~6bps across the curve following the European developments. However, after the Clarida comments the front end sold off sharply. 2yr +0.7bps (0.515%), 5yr -2bps (1.20%), 10yr -5.3bps (1.535%), 30yr -6.5bps (1.905%).
The Technicals Still Matter
After five consecutive weeks of gains, we’ve now seen the S&P essentially trade sideways for the last two weeks. This is positive in that we’ve worked off some of the short-term overbought conditions though you can argue that the leadership has gotten even more extended while the laggards have only gotten weaker. This could make the S&P susceptible to a mean reversion trade. The range in the S&P was very tight this week ~1%. The two very short-term levels I’m watching are this week’s low (~4,670) and the 20d which has now caught up to price (~4,650).
Clearly the set up in the Dow is different as it broke the 20d this week and is now pulling back into the area it broke out from in mid-October where we should start to see some support ~35.5k. The 50d is ~35.2k.
This week oil broke down from its recent range ~80 - ~86 and the 50d moving average ~80.50. A move lower to ~74/75 looks reasonable which would be a test of the 100d and the area we broke out from in September.
VIX not giving a great read. We didn’t see signs of real “stress” today though there is some anxiety. Outside of the Europe situation the Fed uncertainty is likely weighing on investor minds. It looks like we could get a push higher, but if we get a Powell renomination, I think we would get a vol crush which might be all that is needed to kick off the Santa Rally. I don’t necessarily buy into the world is going to shut down again trade.
There was follow through to the USD breakout this week. If this continues it will ultimately lead to conversations about another headwind for multinational earnings but may help the inflation picture if commodities start to react.
The 10yr tested the upper end of the recent range this week before pulling back.