EB Daily Market Report - Friday, December 3, 2021
Executive Market Summary
- Futures were slightly higher overnight on the Dow Jones and S&P 500
- The NASDAQ remained under pressure overnight and the selling has intensified throughout the trading day
- Growth stocks (IWF, -2.50%) are being slammed relative to value stocks (IWD, -0.76%)
- Bonds are clearly the safe haven today, with the 10-year treasury yield ($TNX) falling more than 10 basis points to 1.34%, breaking below the key support level of 1.37% that I was watching
- A falling TNX is synonymous with a choppy or bearish U.S. equities market
- Docusign (DOCU, -43.06%) is the poster child for the weak growth stocks after issuing disappointing future guidance, despite beating consensus EPS estimates
- Among U.S. equities, sector leaders include the defensive consumer staples (XLP, +0.83%) and utilities (XLU, +0.27%)
- The remaining 9 sectors are all lower, led by consumer discretionary (XLY, -2.73%) and technology (XLK, -2.70%)
- Renewable energy ($DWCREE, -6.68%) and software ($DJUSSW, -3.50%) are notably weak; autos ($DJUSAU, -6.17%) lead discretionary stocks lower
- The Volatility Index ($VIX) and equity only put call ratio ($CPCE) are both soaring, indicative of a market that has begun panicked selling - throw out your technical indicators
Market Outlook
Strong bearish sentiment typically marks bottoms. I've shown you the Volatility Index ($VIX) recently and how trips into the 30s can mark very important intermediate-term lows on the S&P 500. All you need to do is pull up a 10-year weekly chart of the S&P 500 with the VIX in a separate panel. With the exception of the financial crisis in 2008 and the pandemic in March 2020, VIX moves to that 30-40 area have coincided with MAJOR bottoms and reversals. I'm expecting the same currently. We could bottom at any time, but another sentiment signal that I like to watch closely relates to options. The equity only put call ratio ($CPCE) has been on the move higher - just like the VIX. It hasn't quite reached a panicked state where bottoms in the S&P 500 form, but we're getting closer:
The red-shaded area shows that the 5-day moving average of the CPCE in that .55-.60 range is where most of our bottoms have formed throughout this secular bull market advance off the March 2020 low. I've highlighted 10 such occasions since July 2020 and I'd say that 9 of the 10 gave very accurate signals.
Today's equity only put call ratio is approximately .94, which is going to lift the above 5-day moving average - probably into that red-shaded area, maybe even higher. That tells me it's growing increasingly risky to short and that we could see a snap-back rally very soon. I wouldn't be surprised to see it happen sometime in the next 1-3 days - it could even be this afternoon. Here's today's equity puts and calls from CBOE.com:
To access this data, CLICK HERE. There will be 3 tables - one for total options, one for index options, then a final one for equity options. Make sure you're looking at that last one. With a little Excel magic, we can see the individual half hour readings on the CPCE, which highlights the fact that more and more retail traders are buying puts. When options traders believe we're going further to the downside, that's usually when we see a market reversal.
Sector/Industry Focus
Let's just take a look at the QQQ (ETF that tracks the NASDAQ 100) to see where we could be heading:
Remember, in a highly volatile market, we can see very deep selling in a very short period of time. That's why trading in this environment is so risky. But if we're able to build positions as the selling intensifies and traders turn too bearish, we have a better chance to profit from the ultimate reversal.
I'm not trying to scare anyone based on the chart above, just trying to keep it real. Secular bull markets do not mean that we go higher every day and every week and every month. We have periods of selling along the way, sometimes very scary periods. We could be in the midst of one of those right now. The chart above shows the potential for selling down to the 350 level, or another 8-9%. That type of selling could happen in just a couple days if selling really intensifies and mass panic sets in. Just be prepared for it if it happens.
ChartLists/Strategies
Given another huge surge in the VIX, which is up more than 22% today to above 34, I believe it's best to remain in cash. Beginning to buy into stocks that you really like during selling episodes like this does make some sense, but just keep one thing in mind. If you mis-time the market bottom by a couple days, it could be 5-10% in terms of a further market drop. The stock market sells off much faster than it goes up. And when we see the VIX in the 30s, market makers are what I call "on vacation". They are not buying to provide liquidity. Instead, they're letting prices fall rapidly, not willing to risk their own capital until the kitchen sink is thrown in by retail traders. We're beginning to see that in the equity only put call ratio ($CPCE), which has been spiking in recent days and as I illustrated above.
Be very careful.
Earnings Reports
Here are the key earnings reports for the next two days, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning.
Friday, December 3:
BMO, RLX, BIG, HIBB
Monday, December 6:
MDB, COUP, GTLB, SAIC, HQY, SUMO
Economic Reports
November nonfarm payrolls: 210,000 (actual) vs. 545,000 (estimate)
November private payrolls: 235,000 (actual) vs. 525,000 (estimate)
November unemployment rate: 4.2% (actual) vs. 4.5% (estimate)
November average hourly earnings: +0.3% (actual) vs. +0.4% (estimate)
October factory orders: +1.0% (actual) vs. +0.5% (estimate)
November ISM services: 69.1% (actual) vs. 65.0 (estimate)
Happy trading!
Tom