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Weekly Trader’s Outlook

Equities hit new highs again amid strong earnings and improving labor market.

Follow me on Twitter @RandyAFrederick. I’ll tweet interesting observations about volatility, put/call ratios, technical signals, economics, option block trades and other unusual activity.

Weekly Market Review:

Earnings Summary

Q3 earnings season is in full swing now. This week, 75 S&P 500 companies reported earnings and 64 of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 116 (23%) of the companies in the S&P 500 have reported Q3 results. Below are the aggregate beat rates relative to the final results from recent quarters.

Quarter       EPS beats      Rev beats

Q3 ‘21             81%                 67%

Q2 ‘21              86%                  83%

Q1 ‘21               87%                  72%

Q4 ’20              78%                  69%     

Q3 ‘20              84%                  74%

Q2 ‘20              85%                  65%

Q1 ‘20              65%                  59%

Q4 ’19              74%                  64%     

Q3 ‘19              78%                  58%

Q2 ‘19              76%                  56%

Q1 ‘19              77%                  57%

Q4 ’18              73%                  60%     

Q3 ’18              82%                  61%     

Q2 ‘18              84%                  72%

Q1 ‘18              81%                  74%

Average           79%                  65%

From a growth standpoint, Q3 earnings are +45.9% y/o/y so far versus the +30% estimate when the quarter ended. Q3 revenue is +16.1% y/o/y versus the +15% estimate when the quarter ended. This compares to +92.0% and +25.3% respectively in all of Q2.

Economics Recap

Better (or higher) than expected:

  • Initial (weekly) Jobless Claims: 290k vs. 297k est
  • Existing Home Sales for Sep: 6.29M vs. 6.10M est

On Target:

  • None

Worse (or lower) than expected:

  • Housing Starts for Sep: 1,555k vs. 1,615k est
  • Building Permits for Sep: 1,589k vs. 1,680k est
  • Industrial Production for Sep: -1.3% vs. +0.1% est
  • Capacity Utilization for Sep: 75.2% vs. 76.4% est
  • NAHB Housing Market Index for Oct: 80 vs. 75 est
  • Leading Economic Indicators for Sep: +0.2% vs. +0.4% est

This was an average week for economic data. At 290k, Initial Jobless Claims came in below the 297k estimate and below last week’s 296k level. Claims are now averaging 320k for the past 4 weeks. This was the third consecutive downtick and both are new post-COVID lows. Aggregate initial jobless claims over the past 84 weeks (since the virus hit) exceed 95M.

Claims

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Market Performance YTD

Here is the 2021 YTD (versus 2020 full-year) performance of the market broken down by the 11 market sectors (as of the close on 10/21/21):

                                                         2021 YTD                2020 Final                 Category

  1. Energy                                     +52.1%                         -37.3%                          Defensive
  2. Financials                                 +35.9%                         -4.1%                            Cyclical
  3. Real Estate                               +29.9%                         -5.2%                            Cyclical
  4. Communications Svc             +24.3%                         +22.2%                         Defensive
  5. Info Tech                                   +21.8%                         +42.2%                         Cyclical
  6. Consumer Disc                         +17.9%                         +32.1%                         Cyclical
  7. Industrials                                 +17.8%                         +9.0%                           Cyclical
  8. Materials                                   +17.1%                         +18.1%                         Cyclical
  9. Healthcare                                +15.5%                         +11.4%                         Defensive
  10. Utilities                                     +6.6%                           -2.8%                            Defensive
  11. Cons Staples                            +5.6%                           +7.6%                           Defensive

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2021 YTD (versus 2020 full-year) performance of the major U.S. equity indices (as of the close on 10/21/21):

                                                            2021 YTD                 2020 Final

  • S&P 500 (SPX)                             +21.1%                         +16.3%
  • Nasdaq Composite (COMPX)    +18.1%                         +43.7%
  • Dow Industrials (DJI)                 +16.3%                         +7.2%
  • Russell 2000 (RUT)                    +16.3%                         +18.4%

 

Technicals

Last week I shared that during my TV appearance on Yahoo Finance on Thursday (10/13) I was asked by host Brian Sozzi, “…do you think we're one or two bad reports away from heading back to those lows we saw a couple of weeks ago in the markets?” to which I replied, “…I don't think so for a couple of reasons… the debt ceiling and the government shutdown. We've now punted both of those things out into December. We're coming out of about a 5%, almost 5.5%, pullback here. I actually think that as this quarter progresses, we might actually trend more back towards the all-time highs rather than back down to the lows.

Last week I stated, “I believe that trend began on Wednesday (10/13). So far, so good, but I’ll revisit this outlook in the coming weeks to see how things are progressing”. Well here we are just one week later and revisiting that outlook is no longer necessary. The SPX has risen for 7 straight sessions, and it closed at a new all-time high on Thursday (10/21).

As a result of the SPX hitting a new high for the first time in 6 weeks, 4,536 has become the new upside resistance level. To the downside, the 50-day SMA (currently 4,445) should provide some near-term downside support followed by the 100-day SMA (currently 4,386).

SPX

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes:

With a boost from expiration week, October option volumes are averaging a very robust 37.8M contracts per day; below the final September level of 38.9M contracts per day but well above the October 2020 level of 28.9M contracts per day. January 2021 remains the all-time record month with 44.3M contracts per day, and February 2021 is second with 43.3M contracts per day.

Open Interest:

OI Change:

The following data comes from the Chicago Board Options Exchange (Cboe) where about 98% of all index options, about 20% of all Exchange Traded Product (ETP) options, and about 14% of all equity options are traded:

In reviewing the VIX OI Change for the past week I observed the following:

  • VIX call OI was -22.1%            
  • VIX put OI was -29.6%              

These sharp declines are due to the October monthly contract expiration on Wednesday (10/20) so the VIX OI Change is N/A for the market in the near-term.   

As a result of the October monthly contract expiration on Friday (10/15), the follow changes are calculated from Monday (10/18) instead.

In reviewing the SPX OI Change for the past week I observed the following:

  • SPX call OI was +3.4%
  • SPX put OI was +4.3%             

While SPX volume tends to be mostly institutional hedging, these changes reflect a small bias toward the put side, so I see the SPX OI Change as moderately bearish for the market in the near-term. 

In reviewing the ETP OI change (which includes SPY, QQQ, DIA & IWM) for the past week I observed the following:

  • ETP call OI was +8.0%             
  • ETP put OI was +6.1%            

These changes reflect a small bias toward the call side, so I see the ETP OI Change as moderately bullish for the market in the near-term.

In reviewing the Equity OI Change for the past week I observed the following:

  • Equity call OI was +8.5%                      
  • Equity put OI was +6.8%                       

These changes reflect a small bias toward the call side, so I see the Equity OI Change as moderately bullish for the market in the near-term.

OI Participation

Index OI Participation is +8.1% versus 2020 levels, so I see it as moderately bullish in the long-term.

Equity/ETF OI Participation is +24.3% versus 2020 levels, so I see it as bullish in the long-term.

Open Interest Put/Call Ratios (OIPCR):

The VIX OIPCR is down 5 ticks to 0.64 versus 0.69 last week. This ratio tends to move in the same direction as the VIX index, so this move is consistent with the VIX which was -1.29 (-7.9%) through Thursday (10/21). However, this decline is probably also being somewhat exaggerated by the October contract expiration on Wednesday (10/20), since it has ticked up immediately afterwards. As a result, it likely indicates that participants may be expecting the VIX to fall only modestly over the next few days. As a result, I see the VIX OIPCR as moderately bullish in the very near-term for the markets. This ratio remains well below its recent 3-month high and below the 200-day SMA of 0.74, so I see it as neutral in the long-term.

The SPX OIPCR is up 5 ticks to 2.15 versus 2.10 last week. Since this ratio tends to move in the same direction as the SPX, this uptick is consistent with the SPX which has risen 78.41 points (+1.8%) through Thursday (10/21). At this level, it indicates that SPX option traders (who are almost entirely institutional) may be expecting the SPX to flatten out a little early next week. Therefore, I see the SPX OIPCR as neutral in the near-term for the market. This ratio is now down 27 ticks since mid-September and is just below the 200-day SMA of 2.19. I see it as moderately bullish in the long-term.

The normally very stable Equity OIPCR is down 1 tick to 0.78 this week versus 0.79 last week. This ratio has barely moved in 4 weeks and it is still at its lowest level since mid-July. At this level it implies that equity option traders (which includes a lot of retail traders) have maintained the same level of bullishness since last week. Therefore, I see the Equity OIPCR as moderately bullish in the near-term for the market. This ratio is now just barely above the 200-day SMA (currently 0.77), so I see it as neutral in the long-term.

Cboe Volume Put/Call Ratios (VPCR):

The Cboe VIX VPCR has been moderately bullish this week. The 1.05 reading on Thursday (10/21) was moderately bullish but the current reading of 0.40 as I’m writing this (mid-day Friday 10/22) is neutral. While this ratio tends to decline as the day goes on, I see it as moderately bullish in the very near-term.

The Cboe SPX VPCR has been moderately bearish this week. The 1.81 reading on Thursday (10/21) was moderately bearish, and the current reading of 1.80 as I’m writing this (mid-day Friday 10/22) is moderately bearish. While intraday levels tend to decline as the day goes on, I see it as moderately bearish in the very near-term. With a 5-day moving average of 1.75 versus 1.78 last week, it remains moderately bearish in the long-term.

The Cboe Equity VPCR has been bullish (<0.50) this week. The 0.44 reading on Thursday (10/21) was bullish, but the current reading of 0.62 as I’m writing this is neutral. Since this ratio tends to decline as the day goes on, I see it as moderately bullish in the very near-term. With a 5-day moving average of 0.43 versus 0.46 last week, I see it as bullish in the long-term too. As noted below, long-term for this ratio is about a week or two.

Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week or two.

OCC Volume Put/Call Ratios (VPCR):

The OCC Index VPCR has been bearish (>1.40) this week. As a result, I see it as bearish in the near-term. It has been mostly bearish for the past 11 weeks too, so I see it as bearish in the long-term.

The OCC Equity VPCR has been bullish (<0.63) this week. Therefore, I see it as bullish in the near-term. With a 5-day average of 0.53 versus 0.63 last week, it is bullish in the long-term.

Volatility:

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 10/22), the VIX is +0.93 to 15.94. At its current level, the VIX is implying intraday moves in the SPX of about 38 points per day (this was 37 last week). The 20-day historical volatility is 118% this week versus 158% last week. The VIX is now well below its long-term average (19.54) but still above its long-term mode (12.42) which I consider to be “normal” volatility. The VIX is down about 2 points from its intraday high earlier this week, and at this level I see the VIX as bullish in the very near-term for the equity markets. The VIX is 13 points lower than it was just 4 weeks ago, and less than 2 points above its YTD low, so I see it as moderately bullish in the long-term.

On a week-over-week basis, VIX call prices have risen while VIX put prices are little changed. At +221 versus +179 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is higher, and at this level is still moderately bearish in the very near-term. The VIX IV Gap has gone from negative back to positive and back again several times over the past 5 weeks, so I see it as volatile in the long-term.

Keep in mind, this is not only a contrarian indicator most of the time, it tends to be one of the earliest and shortest-term indicators I discuss in this report, so it can also change directions very quickly.

VIX Futures

As of this writing (mid-day Friday 10/22) the nearest VIX futures contract (which expires on 10/27) was trading at 16.80; not quite a point above the spot VIX level of 15.94. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 16.48; about a half point above the spot price.

With an adjusted level that is only about a half point above the spot price, futures traders are indicating that they believe the VIX is unlikely to drop any further over the next few days. Therefore, I see VIX futures as neutral in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 17.85 and 18.06 respectively. With the RPAPs of the further-dated contracts both about 2 points above the spot price, I see VIX futures as moderately bearish in the long-term for the SPX.

Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.

With the VIX down more than a point this week, VIX Hedging Effectiveness has fallen to Poor in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing very little sensitivity to market volatility, and may not be effective as hedging tools in the very near-term. VIX Hedging Effectiveness is Moderate in the long-term.

VIX Hedging Effectiveness is a manner of measuring the magnitude of VIX moves relative to the magnitude of SPX moves in the opposite direction. When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.

Global News:

Cryptocurrencies

As the disclaimers at the bottom of this page say: All stock and option symbols shown are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. The information presented does not consider your particular investment objectives or financial situation (including taxes) and does not make personalized recommendations. The investment strategies mentioned here may not be suitable for everyone.

With that said, an Exchange Traded Fund launched on Tuesday (10/19) and gained nearly 5% on its first day of trading on volume that exceeded 24M shares; the second-most highly-traded ETF debut ever. The ETF holds bitcoin futures contracts, not actual bitcoin. That is an important factor to be aware of because futures involve transaction costs, roll costs and contango costs, all of which could contribute to underperformance or a large tracking error versus Bitcoin spot prices. For Schwab’s perspective on cryptocurrencies, please visit: www.schwab.com/cryptocurrency

COVID-19

As the chart below shows, the Centers for Disease Control (CDC) reported this week that the US is now averaging about 70,000 new cases per day (versus 90,000 last week).

Cases

Source: Bloomberg L.P.

As the chart below shows, vaccination rates have ticked up to about 700k per day (versus 600k last week).

Vaccinations

Source: Bloomberg L.P.

Economic reports for next week:

Mon 10/25

None

Tue 10/26

Case-Shiller Home Price Index for Aug – This index measures the change in the average prices of single-family, residential real estate across a broad section of 20 major cities in the US.

Conference Board Consumer Confidence for Oct – There are several other confidence measures, such as the University of Michigan Consumer Sentiment, and they don’t always agree. Gasoline prices and stock market performance tend to have the biggest impact on these measures.  

New Home Sales for Sep – This report measures sales activity of newly constructed homes and other single-family dwellings, and is generally considered less important than building permits since it is more of a trailing report.

Wed 10/27

Durable Goods Orders for Sep – This is a key measure of consumer and industrial spending trends and often causes market swings if it misses estimates.

Thu 10/28

GDP for Q3 – This is the first estimate (Advance) for Q3 and the consensus estimate is +3.0%, which would be a decrease from the +6.7% in Q2.

Initial Jobless Claims - For the week ending 10/16/21, claims were down 6k after being down 33k the prior week. The 4-week moving average now stands at 320k, down 10k from the prior week, but still above the pre-pandemic level of 233k.

Pending Home Sales Index for Sep – This report measures actual contracts signed, whereas existing sales (reported last week) measures actual closings, so this one is slightly more forward looking. This one will usually only affect equity markets adversely if it comes in very low.

Fri 10/29

Employment Cost Index for Q3 – This is a measure of payroll compensation costs, which is typically the largest cost of doing business. Wage inflation is important because of its potential impact on profit margins. Wages tend to rise when labor demand exceeds labor supply.

Personal Consumption Expenditures (Core PCE) for Sep – PCE includes durable goods and nondurable goods which are directly influenced by the retail sales reports and services. This is the Fed’s preferred inflation gauge.

Personal Income & Spending for SepThese reports use data from the monthly employment report to gauge income from wages and salaries. Personal income is also sometimes used to forecast future consumer spending.

Chicago PMI for OctThis report is a gauge of business conditions within manufacturing and service firms in the Chicago area. A reading above 50 indicates expansion and a reading below 50 indicates contraction.

University of Michigan Consumer Sentiment for Oct – This is the Final report for Sep. At 89.8, the mid-month report was unchanged from the prior month.

Interest Rates:

On Thursday (10/21) The Federal Reserve announced that top officials would no longer be allowed to purchase individual equities or individual bonds. Investments that are allowed, must also be held for at least one year. Federal Reserve Board Chair Jerome Powell said the new rules were meant to “help guard against even the appearance of any conflict of interest in the timing of investment decisions.” This policy change is happening just 6 weeks after reports of active trading in 2020, led to the resignations from Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren.

Starting at about 1.59% on Monday, interest rates on the 10-year Treasury Note ($TNX) rose steadily throughout most of the week. At the time of this writing (mid-day Friday 10/22) they were at 1.67%; their highest level since mid-May.

Outlook:

While renewed inflation worries may cool equities a bit after 7 consecutive up days, strong earnings are likely to continue to drive markets and the indicators point to a little more upside for next week.

Bottom Line:

After 7 consecutive up days, the SPX paused a bit mid-day on Friday (10/22) seemingly because Fed Chair Jay Powell expressed some concern about persistent inflation pressures, noting that the Fed would “adapt accordingly”. While he admitted supply chain disruptions and inflation pressures are lasting longer than originally anticipated, he reiterated his perspective that they remain temporary. While the Fed Funds Futures probability of an interest rate hike in June 2022 rose from 25% to 31% on the news, that is still a relatively low probability and that is still 8 months in the future. However, with equities at an all-time high, they tend to become hypersensitive to even moderately negative news.

Last week I said, “Earnings season is now underway and the results have been quite good so far, so that will likely be the main driver going forward”. Indeed, Q3 earnings (discussed in the Earnings Summary section above) have been quite strong and equities are back to all-time highs. As you can see below, there were about an equal number of upgrades and downgrades this week. While it wouldn’t surprise me to see a small pickup in volatility, the consensus of the indicators for next week remains Moderately Bullish.

Composite

Past performance is no guarantee of future results.

Key:

OI = Open Interest

OIPCR = Open Interest Put/Call Ratio

VPCR = Volume Put/Call Ratio

IV = Implied Volatility

+ means this indicator has changed in a bullish direction from the prior posting.

– means this indicator has changed in a bearish direction from the prior posting.

+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.

^ means this indicator is at a historical extreme that has often (though not always) preceded a market reversal.

What You Can Do Next

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Important Disclosures:

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. With long options, investors may lose 100% of funds invested. Multiple leg options strategies will involve multiple commissions. Protective puts increase your cost basis in the underlying security. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options."

All stock and option symbols and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Past performance should not be construed as indicative of future results.

Multi-leg options strategies will involve multiple commissions. Spread trading must be done in a margin account. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received. Commissions, taxes and transaction costs are not included in the examples used in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.

Schwab does not recommend the use of technical analysis as a sole means of investment research. The information presented does not consider your particular investment objectives or financial situation (including taxes), and does not make personalized recommendations.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author's opinions may change, without notice, in reaction to shifting economic, business, and other conditions. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Any opinions expressed herein are subject to change without notice. 

Please contact a tax advisor for the tax implications involved in the strategies referenced in this article. Supporting documentation for any claims or statistical information is available upon request. Futures trading carries a high level of risk and is not suitable for all investors. Past performance is no guarantee of future results.

Investing involves risks, including loss of principal. Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against loss. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

All references to subjects (securities, indexes, futures contracts, and options contracts) were derived based on screens conducted by the writer for certain anomalous activity such as volumes, volatility and other related market data. As needed for brevity, the writer may have applied discretion when choosing among screen outputs for inclusion. Such discretion may have been based on news reports or other considerations of public interest. The views or opinions are those of the writer, and are subject to change without notice. All referenced subjects were chosen for illustrative purposes only and should not be considered recommendations, offers to sell, or solicitations of offers to purchase.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party. The information provided here is for general informational purposes only. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc. Index used for the 11 market sectors. 

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation. The NASDAQ Composite Index is a broad-based market-capitalization weighted index of 2,630 stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Dow Jones Industrial Average is a price-weighted index of 30 stocks compiled by Dow Jones as a way to gauge the performance of the industrial component of America’s stock markets. The Russell 2000 Index is a market-capitalization-weighted index comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.

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