Weekly Recap:

by Michael Reinking, CFA - Sr. Market Strategist
DOW 33,978 (+29), S&P 500 4,071 (+10), Russell 2000 1,911 (+8), NYSE FANG+ 5,356 (+139), ICE Brent Crude $86.33/barrel (-$1.14), Gold $1,928/oz (-$2), Bitcoin ~23.1k (-22)
The best way to describe this week's trading action and last week's for that matter is, resilient. Since it is a Friday if you're so inclined you may use this word as the basis for a game you may have played back in college as you read the rest of this note. We ended last week with a tech/growth driven rally on Friday which helped major indices recoup a good portion of the mid-week selloff. There was some upside follow through on Monday with the S&P 500 ending up ~1% with the same leadership. There were selloff attempts over the next two days but on neither occasion could sellers keep stocks lower and on Wednesday there was an >1.5% reversal off the low. As we pointed out earlier this week, this type of price action, which we already characterized as resilient, had to have bears uneasy. This coupled with economic data and an earnings season that have both also remained more resilient than feared has forced investors to rethink their negativity and positioning.

For the week the S&P 500 ended up just 2.5% bringing YTD gains to 6%. If we can hold these gains through next Tuesday this would be the best January since 2019 (more on this later). This is impressive in its own right but it pales in comparison to the rally seen in some of the largest technology stocks. This week the NYSE FANG+ index was up 9.1% bring the YTD gain to ~20% (~30% off the November low). This is even more impressive if you recall that it had started off in a pretty decent hole after the first couple of days this year.
The trading action overseas was a bit more muted this week with China closed for the holiday. Hong Kong exchanges re-opened yesterday and the Hang Seng ended the week up ~3% amidst positive mobility and consumer trends seen over the holiday. The Nikkei was up a similar amount as the Yen strengthened modestly after the minutes from the BOJ's policy meeting were veiwed dovishly. Japan's indices have more tech exposure than Europe which also explains some of the outperformance this week. India was an exception this week as it was weighed down by the companies related to the Adani conglomerate after a short report by Hindenburg Research.
With the Fed on the sidelines this week the primary catalysts came from earnings and economic data. Let's dive a little deeper into both.

Coming into this quarter analysts cut earnings estimates  significantly, nearly 7% from the end of Q3. There was also a growing concern that as companies more formally issued 2023 guidance that there would be more significant cuts to come. At this point about a third of companies in the S&P 500 have released results and it seems like the bar had been sufficiently lowered ahead of the quarter once again. That is not to say the results have been really strong but they are definitely better-than-feared. According to FactSet Earnings Insight ~69% of companies that have reported have beaten estimates by an average of 1.5%. These are far below the recent averages however, I focus more on the 10yr averages  of ~73% and 6.4%, given the distortions over the last few years. 

Looking at guidance not everything has been roses, but we are not seeing a throw the baby out with a bath water, type of quarter by any means. Since the start of earnings season a couple of weeks ago the bottoms up analyst earnings estimates for 2023 have only been cut by ~1% to ~$225. I know we just started the year but since markets are forward looking the 2024 estimate is currently ~$250 and it has only come down a smidge as well. We'll continue to monitor this as we move forward.

Given how resilient economic data was in Q4 it is not terribly surprising that earnings are holding up as well. Let's go through some of the key themes. Guess who remains resilient, the consumer, bank and payments processors have said spending continues though has moderated. The shift from goods to services is still very apparent and commentary around travel remains very strong also evidenced by airline results. On the goods side, consumer products companies which have been raising prices over the last year are seeing volumes drop off.  

Financial firms have been increasing provisioning and NCOs while other credit metrics have deteriorated slightly, but this is to be expected at this point in the cycle. Multiple companies have highlighted that these credit metrics remain below pre-pandemic levels.

Broadly we've heard that supply chains continue to improve which is allowing firms to work through some of their backlog. At the same time we're seeing an inventory normalization. This destocking is behind some of the weakness seen in the semis and chemicals. While there is some demand moderation much of the commentary suggests a turn later this year. Multiple firms have highlighted the pent-up/returning demand from China as a potential tailwind. We have also seen some of the FX headwinds reverse.

The other big theme has been cost cutting measures being enacted which is also helping to mitigate some potential earnings weakness. The layoff announcements are starting to come from companies outside of just technology. Staffing firm, Robert Half, acknowledged a slowdown in hiring activity and drawn out sales cycles, but broadly I'd say the commentary on their call was sanguine related to the labor environment.

Thus far this quarter is playing out in a very similar fashion to the last few, as we suggested it might in our Earnings Preview, Kicking the Can?. One of the things that was different this time around was the price action ahead of earnings season. In the last few quarters equities were near YTD lows at the start of earnings season which wasn't the case this time around. We have rallied pretty significantly going into a very important week, with some of the largest companies set to report, so this does give us a little pause.  
Economic Data/Fed:
This week's economic data was mixed but does continue to feed the soft landing narrative that has been building over the last month. This week there were continued signs that the economy is decelerating but so are inflationary pressures. Leading indicators (see Chart below) fell for the tenth consecutive month the longest streak since 2008 (22 that time around). US PMIs remained in contractionary territory but there was some modest improvement m/m. New orders continued to move lower, employment metrics did moderate while prices components ticked higher, breaking a seven month streak. Sticking with PMIs there was a notable increase in Europe which actually moved into expansion for the first time since last June.
Q4 GDP came in better than expected at 2.9% (vs. 2.3%) which was down from 3.2% but didn't really show any signs of falling off of a cliff. Within the data personal consumption was 2.1%, weaker than expected. The savings rate ticked up to 2.9% from 2.7%. Given GDP is so backward looking it does not overly impact market activity and this time was no different. The initial Atlanta GDPNow forecast for Q1 was released today at 0.7%.

Today's personal income and spending data showed similar trends in December with personal spending declining by 0.2% a touch more than the estimate of -0.1%. Personal income was inline with estimates at 0.2% down from 0.4% last month. Personal savings as a % of disposable income was up to 3.4% from 2.9%.

Today's inflation data was also pretty much in line with estimates with headline flat m/m while core did accelerate to 0.3% from 0.2%. However, on an annual basis there were significant declines to 5%/4.4% from 5.5%/4.7%, respectively in November. Today the Dallas Fed also released its Trimmed mean PCE which fell to 3.8% on a six month annualized basis. This is all moving in the right direction and the trends are even better when looking at things on a 3mo annualized basis.

Lastly touching on the labor market it remains resilient with initial claims falling to 186k hitting its lowest level since April. The labor market will be the focal point of next week's economic data with particular attention paid to the employee cost index after Fed Vice Chair Lael Brainard highlighted this in her speech last week. A perfect segue into the Fed, but before we touch on next week's meeting there were reports that President Biden is considering Mrs. Brainard as Chair for the National Economic Council which would potentially remove one of the dovish voices from the committee.

The big catalyst next week is the Fed meeting and they are widely expected to hike rates by 25bps. The Federal Reserve will likely acknowledge the moderation of economic activity and inflation trends, while continuing to point to the resilience of the labor market. This week there were a couple of central banks that did signal the end of the tightening cycle including our neighbors north of the border.  I don't think the Fed will want to signal and end to the hiking cycle just yet, but we are getting pretty close. Markets have started to price in some probability that this is will be the last hike.

The big question, since financial conditions have been easing (see Chart Below) will Fed Chair Powell will do a repeat Clubber Lang performance. I think he will try to temper market enthusiasm, but with the data moving in the right direction his commentary may fall on deaf ears anyway. I don't foresee a big shift in the message as he will likely suggest 25bps hikes are appropriate going forward as the central bank finds its way to the right restrictive level. How he couches where we are relative to that will be closely watched. I think his focus will continue to be on duration as opposed to the absolute level.
Yields moved a touch higher this week but the day to day moves were pretty muted. Last week we once again highlighted the importance of volatility in the bond market which was a key for equity markets last year. The ICE BofA MOVE index fell sharply this week to ~100 from ~115. This was a break lower and today it closed at the lowest level since June. The spread between the VIX and the ICE BofA MOVE index had widened last year. The VIX seemed to have potentially set a new lower range, call it 15-25 recently, but the the MOVE index was remaining stubbornly high. This break could be supportive of continued equity strength, though I will admit the timing ahead of next week's Fed meeting is somewhat curious.
Corporate credit had modest gains this week and continues to trade well. I also wanted to highlight the NY Fed released it Corporate Bond Market Distress Index which you can see has been improving since October. Like the MOVE index there has been a notable move lower since the start of the year especially for investment grade.
Very quiet in FX markets this week. The USD keeps consolidating in a pretty tight range at YTD lows between ~$101.25 - ~$102.
This week in commodity markets was really about consolidating recent moves. There was a notable reversal lower today in ICE Brent after testing YTD high ~$89 it close ~$86.40. Natural gas prices have continued to move lower with Henry Hub breaking below $3. Metals markets have been rallying on China optimism and were pretty quiet this week. Lumber has been moving higher under the wire being helped by some of the better than expected housing related data over the last few weeks and the fact that it got smashed last year.
The Wrap:
There has been a significant move higher to start this year which is at least partially related to the persistent negativity and light positioning seen over the last year. As we highlighted late last year, there were improving dynamics in the macro backdrop (China, Europe). We also highlighted that corporate earnings could prove to be more resilient than feared with some improving dynamics to help offset the expected demand weakness (supply chain improvement, USD weakness, cost pressures easing comm./logistics). In addition, there were some historical tailwinds around the presidential election cycle, returns post inflation peaks and returns following a calendar year loss. Lastly, if we can get through Tuesday with the S&P 500 closing out the month higher that would be the third of the "January Indicator Trifecta" followed by the Stock Trader's Almanac to end in positive territory. There have been  31 years when all three of these have aligned. The index ended the year up in 28 of 31 instances by an average of 17.5%.

The significant move higher ahead of a catalyst packed week does leave the market a little susceptible to some volatility. I don't think this year will be a one way market in either direction. I would not be surprised if this move forces a further chase but be prepared for the ebbs and flows.
The Technicals Still Matter:
On Monday the S&P 500 cleared last week's high ~4,015 but then pulled back breaking below the 200d intraday on Wednesday. It bounced as it approached the 50d and quickly reclaimed the 200d closing right back ~4,015 again. This was the key day this week and forced a rethink by the bears. Today the index got within 5pts of the December high ~4,100 before pulling back into the close. This will be a key level next week to the upside.

The technical picture has been improving and is pretty good. The index has gotten back over the 200d and is clearing the downtrend line that has been in place over the last year. Clearing 4,100 would make a new higher high and could set up for a test of the big overhead resistance between 4,175-4,300. This is where we broke down from on the H&S last year. To the downside the important moving averages (20, 50, 200) are converging ~3,950 The index has been making a series of higher lows for that to continue we would not want to violate (3,765-3,800).

I do think there is still some work to do from a longer term perspective as the 200d is still declining but once this flattens out and we retest that could be a really good spot.

Last week
Early this week the S&P 500 made a couple of half-hearted attempts to clear 4k but could get any separation. Then on Wednesday the bad may really be bad rethink took place and sent markets sharply lower. That pull back tested and held the secondary support level we highlighted last week at the 20d (~3,875). Friday's rally initially paused at the 50d (~3,930) before exploding in the last couple of hours closing at the 200d again. This week's extremes will be the key levels to watch week (3,875 &  4,015). Other longer-term takeaways from last week unchanged.
NYSE FANG+ index broke above its 200d this week for the first time since last January and we're already ~7% above it and starting to get a bit stretched. Some consolidation is in order.

The Dow is further along in its consolidation process over the 200d but it isis a little further away from its December high (~34.7k).
VIX - This continues to act like we are in a new vol. regime. We did get a move higher this week on the Wednesday selloff and failed at 21. We ended the week at a new low ~18.50. There are some big catalysts next week so we could see a little pickup early in the week. If we get through next week somewhat unscathed I would be looking for new YTD lows here maybe down to 15.

Last week
Last Friday's close was the low, which we often see heading into weekends, as traders don't want to deal with theta decay. Volatility did start to move up on Wednesday but topped out yesterday just below 22 fitting in with the new volatility range theory we laid out last week. With today being options expiration and a good amount of premium rolling off it will be interesting to see if this pops next week (watch 22).
10yr - No real change to last week's commentary.

Last week
US yields continued to move lower this week briefly breaking below the December lows before bouncing back modestly. Stand by the idea that we should get "sticky" in this area holding around the rising 200d (10yr ~3.32%). On a move to the upside watching ~3.65% which is recent minor high on 1/10 and around the 20d/50d which is rolling over.
USD - This was an inside week as the rate of change to the downside slows after a significant move lower over the last 3 months. This is a little tough as there are conflicting views based on the time frame. From a short/medium term perspective watch this week's extremes ($101.30/$102.30). I wouldn't be surprised if we get a little bit of a counter-trend move but nothing has gotten extreme yet. If we do pop watch how it reacts at the 50d (~104). Lot of central bank commentary next week.

Last week
Tight range this week by recent standards with the extremes on both ends hit on Wednesday. This week the index consolidated just under the December lows ~103. It did trade within a penny of the 50% retracement level (101.25) we highlighted last week before bouncing (close enough for government work).
Gold - Gotten the consolidation we've been looking for over the last two weeks. Did close just below 8d today for first time. 20d has been catching up to price ~1,894.

Last week
This is momentum trading at this point. For the week it was pretty much unchanged with the commodity riding the very fast 8d on the way up. A break of that fast ma will lead to the 20d test we discussed last week. Hard to chase here the 20d is now around ~1,865.
Oil - Very similar thoughts to last week. The one notable piece of action was the reversal at the December high today (~$89). Let's see if there is any downside follow through next week. First level to watch $85 with 50d just below that ~83.50.

Last week
ICE Brent spent the week holding just above the 50d (~84) and trading just below the December high ~89. Looks like we could be setting up for some ping pong action between the 50d & 200d (~$91). Level to watch on the downside is this week's low/50d (~$84). Daily chart not offering a lot of clues but longer term chart is more constructive.

Bigger picture this pullback over the last six months has now taken the commodity back to the levels we broke out from at the end of 2021 and it is holding at the 100W ma.
Copper - Similar to gold but more extended and extreme. Broke below 8d today 20d just below at this point (~4.10). Feels like this needs some more time, so 50d might be a better level (~3.90)

Last week
As we highlighted last week very similar to gold situation. This too is riding the 8d and was about unchanged this week. There was a big topping tail on Wednesday but no downside follow through. Watch the 8d and look for a test of 20d just under $4.
Bitcoin - After last Friday's surge higher this got above the 200d and has held there this week. It did push to just under 24k this week before starting to consolidate. It is holding above the really fast 8d and is allowing some of the medium term ma's to catch up. 24k-25k is the high back to August, its 200w (~24.7k) is also in that range. These are big levels and there is air above that up to ~27.5k and the much bigger level of 30k where the big break came from bringing back the longer term chart for perspective.

Last week
Bitcoin @1:00- Last week's rally extended primarily over the weekend and then this has been consolidating right around 21k just below the Sep/Dec highs and the 200d (~22.4k). Very short-term the momentum pattern looks pretty good as it a carving out a bull flag, watch the 8d for continued upward moment. However, it gets a little trickier as you look at it longer term as the 200d, which is still moving sharply lower, is just overhead. This is the first 200d test since last March when it was >45k so I think it will take some time to do longer term repair.

Bitcoin @4:00- This exploded an additional 1k at the end of the day with the other risk assets and sitting right at the 200d. This is an upside break of the bull flag pattern which I could make the case targets a move to ~24.5k which would be a test of the August highs.
What's on Tap Next Week:
We officially put January in the books on Tuesday. It is going to be a very busy week with a mix of earnings, economic data and central bank rate decisions. We are in the peak of earnings seasons with ~20% of companies in the S&P 500 set to report next week. The biggest catalyst of the week will be the Fed Rate Decision on Wednesday, followed by rate decisions from the Bank of England and the ECB the following day. In terms of economic data the focus will be on the labor market highlighted by the Employee Cost Index (Tues.), JOLTS Job Openings (Thurs) and the BLS Employment Report (Fri.). The other highlights include the ISM surveys (Wed/Fri), China PMIs and EU CPI (Wed). There is also an OPEC+ meeting on Wednesday, though no production changes are expected. If you were playing along with the game earlier you'd only be 8 deep so you may have made it, I tried not to make it too obnoxious. Good luck to those of you with a rooting interest in the Divisional Round except Eagles fans (insert sad face here). Have a great weekend!  
  • Monday -
  • Earnings: BEN, GEHC, SOFI
  • Economic data:
  • US: Dallas Fed Manufacturing Index
  • Global: Germany Q4 GDP, Spain CPI (prelim)
  • Central Banks
  • None
  • Auctions: EU 5/10yr
  • Earnings Post-Market -  AGNC, ARE, CFLT, HP, NXPI, PCH, PFG, SANM, WHR, WWD (Samsung Electronics overnight)
  • Tuesday - Month End
  • Economic data:
  • US: Q4 Employee Cost Index, Case Shiller Home Prices, Chicago PMI, Dallas Fed Services Index
  • Global: China NBS PMIs/Industrial profits, Japan/Korea retail sales/Industrial production, Germany CPI (prelim)/employment/retail sales/import prices, EU Q4 GDP
  • Central Banks
  • 2 Day FOMC Policy Meeting Begins
  • Auctions: Italy 5/10yr
  • Energy - API Inventories
  • Wednesday -
  • Economic data:
  • US: Mortgage apps, ADP Employment, Final Manufacturing PMI, ISM Manufacturing, JOLTS Job Openings, Construction spending
  • Global:  China Caixin Manufacturing PMI, India Manufacturing PMI, EU CPI (prelim)/Employment/PMI (final)
  • Central Banks
  • FOMC Policy Decision
  • Rate Decisions: Brazil
  • Auctions: 10yr Bund
  • Energy - OPEC+ Meeting, EIA oil inventories
  • Thursday -
  • Economic data:
  • US: Claims, Challenger Job Cuts, Factory Orders
  • Global: Korea CPI, Germany Trade,
  • Central Banks
  • Rate Decisions: BoE, ECB
  • Auctions: 10yr JGB, Spain 3/7/20yr, France 10yr, Canada 10yr
  • Energy - Nat Gas Inventories
  • Friday -
  • Earnings: AON, CBOE, CHD, CI, LYB, REGN, SAIA, ZBH
  • Economic data:
  • US: BLS Employment Report, Services PMI (final), ISM non-manufacturing,
  • Global: China Caixin Services PMI, India Services PMI, EU PPI, EU/UK Services PMI
  • Central Banks
  • None
  • Energy - Rig Count
  • Earnings Post-Market: None
Have a great weekend!

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