Short Interest Update Wed, Feb 10, 2021 Yesterday, bi-weekly short interest data was released for the period ending January 30th. In the chart below, we show the Russell 3000 broken up into deciles based on short interest as a percent of the float at the end of 2020 and these decile's stock's median change in short interest from then to yesterday's release. As shown, with the short squeeze episode playing out in the second half of January, the stocks that came into 2020 the most heavily shorted have seen the biggest declines in short interest. That decile of what had been the most heavily shorted names has seen short interest as a percent of float fall for a median of 2.65 percentage points. Deciles two and three have similarly seen sizable declines, though, they are far smaller than those of the most shorted stocks. On the other hand, the decile of the least shorted stocks is the only one that has seen the median short interest reading move higher since the end of 2020. In the table below, we show the stocks that currently have the highest short interest as a percent of float. After the historic move higher, short squeeze poster child GameStop (GME) is no longer the Russell 3000's most heavily shorted name! Having dropped over 100 percentage points since the start of the year, only 42.61% of shares are now short compared to 43.57% for Gogo (GOGO); currently the most shorted stock in the index. GOGO has actually seen its shorts come off a bit this year as well but that decline has been far more modest of only a little more than one percentage point. Of the other stocks in the index, only Tanger Outlets (SKT) and Dillard's (DDS) also currently have more than 40% of the float sold short. On the January 27th closing high, GME was up 1,744.53% year to date. But with the short squeeze unwinding, the stock has fallen over 86%. Others of this cohort have similarly seen big reversals of their earlier surges. For example, National Beverage (FIZZ) had doubled YTD at the time of the GME peak, but since then it has been cut by 33.78%. Not all of these have been losers since the pinnacle of short selling though. Fulgent Genetics, which now has over 30% of shares short, has risen 91.01%. Clovis Oncology (CLVS) and Ligand Pharmaceuticals (LGND) have similarly seen big gains of over 30%. Given GME came into the year with an absurd number of shares sold short, the squeeze has resulted in it being the biggest decliner in terms of short interest of any Russell 3000 stock. Short interest as a percentage of float has fallen over 100 percentage points YTD. The next biggest drop came from BigCommerce Holdings (BIGC) and Dillard's (DDS) which both saw larger than 50 percentage point drops. Of the rest of the top twenty biggest decliners, a baker's dozen have seen short interest drop by at least 20 points. Additionally, of these stocks that have seen short interest fall the most, only three—nCino (NCNO), Berkeley Lights (BLI), and 3D Systems (DDD)—now have a single-digit short interest as a percent of float. Given the massive short squeezes, there are far more stocks that now have a lower short interest as a percent of float than at the start of the year. In fact, of the Russell 3000 stocks, 1887 have seen declines in short interest compared to only 1146 that have seen an increase. In the table below, we show the twenty stocks to have seen the biggest increases in SIPF since the start of the year. As shown, there is only one, International Game Technology (IGT), that has seen short interest rise by double digits since the end of 2020. Retailers notably dominate the list of stocks with the biggest declines in short interest. To quantify this, in the chart below we show the aggregate number of shorted shares as a percent of total float for each industry group as of the most recent short interest data and the end of 2020. As shown, just as it was at the start of the year, retailers remain the most heavily shorted industry group, but it has greatly improved with only 5.86% short compared to 8.15% at the end of 2020. That is the only industry group to have seen short interest drop by a full percentage point or more. The industry group to have experienced the next largest decline was Transportation with aggregate short interest falling from 5.08% to 4.13%. Conversely, there are two industries, Banks and Materials, that have higher short interest as a percent of float than they did at the end of 2020.
Bull-Bear Spread Spiking Thu, Feb 11, 2021 Equities have been on a hot streak recently with the Dow and S&P 500 snapping six-day winning streaks earlier this week and the Russell 2,000 ended a seven-day winning streak on Wednesday. As a result, sentiment has understandably followed price action. The percentage of investors reporting as bullish in the AAII's weekly survey has risen to 45.5% from 37.4% this week. That is a return back to similar levels to the end of 2020. The 8.1 percentage point jump this week was the largest for bullish sentiment since a 17.88 point increase on November 12th. Inverse to bullish sentiment, bearish sentiment collapsed by 9.3 percentage points coming in at 26.3%. That is the lowest reading since the week of December 24th when less than a quarter of respondents were bearish. This week's decline was in the bottom decile of weekly changes since the beginning of the survey and was also the largest drop in bearish sentiment since the week of October 17th when it fell by 12.91 percentage points. The large moves in opposite directions of bullish and bearish sentiment led the bull-bear spread to leap from a barely positive reading of 1.8 all the way up to a five-week high of 19.2. That comes after it was actually negative only two weeks ago. The 17.4 point increase stands in the top 10% of all weekly changes in the spread and was the largest move higher in roughly three months since the week of November 12th when it rose 24.5 points. Across the history of the AAII survey dating back to 1987, there have been 224 weeks including the most recent in which the bull-bear spread has risen by at least 15 points in a single week. Only 39 of those have occurred without another occurrence in the previous 3 months. Whereas historically, the AAII survey has been more of a contrarian indicator meaning more bullish sentiment has been followed by weaker returns and vice versa for more bearish readings, in terms of the second derivative of the bull-bear spread, big jumps have preceded stronger than normal returns. As shown below, past times that the bull-bear spread has risen at least 15 points in one week without another occurrence in the past 3 months, the S&P 500 has consistently traded higher over the next few weeks and months with average gains larger than the norm for each period. Moves higher have also been very frequent. One year after these past occurrences, the S&P 500 has traded higher better than 90% of the time. While overall sentiment tipped bullish in a big way this week, neutral sentiment has also continued to rise. For the third week in a row, a greater share of respondents reported neutral sentiment. That reading rose to 28.3%, the highest since the week of Christmas.
Homebuilders Hot While Purchases Decline Wed, Feb 17, 2021 The housing sector remains on fire and as such, homebuilder sentiment remains historically elevated. After falling for the past two months, the NAHB's Housing Market Index experienced a small bounce in February. The index rose from 83 to 84 compared to expectations of no change. At 84, it is still 6 points below the November record high of 90, but that is also above any other reading in the history of the data prior to October. The improvement in the headline number this month was driven entirely by higher traffic. That index was up 4 points month over month and now sits 5 points below November's record high of 77. Meanwhile, of the other components, Present Sales went unchanged at 90 while optimism for the future was dented with that index dropping to a six-month low of 80. Again, although those readings have not improved, they remain historically strong. As with the different categories of the report, the readings across the various regions' indices were mixed. The West was the only region where homebuilder sentiment declined. Granted, that drop was only 1 point and at 91, the index still ties the pre-pandemic record high. Meanwhile, the South went unchanged and the Midwest experienced a small rebound. One of the more notable changes of the whole report was sentiment in the Northeast. Even though it too has been at some of the strongest levels on record, over the past few months the region's reading on homebuilder sentiment has been a significant laggard compared to the rest of the nation. From its high of 87 in October, the index for the Northeast fell 19 points through January. For comparison, in that same span, the Midwest index fell only 4 points while the South and West were up 1 and 3 points, respectively. In February, though, whereas other regions remain several points off their highs, the Northeast put in a new record high after lurching 21 points higher. The only times that this index has risen by more in a single month was in June (31 points) and July (22 points) of last year. As for other housing data released this morning, the MBA's weekly reading on mortgage purchase applications has continued to fall. Since the peak in mid-January, mortgage purchase applications have fallen nearly 14%, and the index now sits at the lowest level since the first week of November. Granted, that is still well above pre-pandemic levels, so it's hardly a weak reading. Higher mortgage rates likely in part played a role in that lower reading in mortgage applications. As shown below, with a broader rise in rates recently, the national average for a 30 year fixed rate mortgage has gone from a low of 2.82% just over a week ago to 2.94% yesterday; tied with January 12th for the highest rate since the end of November. That has also been the biggest one-week rise in the average mortgage rate since August. Like the macro data released today, homebuilder stocks are in turn off their highs. After reaching extreme overbought levels last week at the top of its uptrend channel that has been in place over the past few months, the S&P Homebuilders ETF (XHB) has been mean-reverting over the past couple of days. With the downward move, the 50-DMA will be a support area to watch as it consistently has been since the summer.
Ohio Drives Claims Nationally Thu, Feb 18, 2021 Jobless claims disappointed this week as both initial and continuing claims came in above expectations. In addition to an upward revision of 55K to 848K last week, initial jobless claims were higher at 861K this week. That brought claims to the highest level since the week of January 15th when they were 14K higher at 875K. This week also marked the third week in a row without an improvement in jobless claims. Although the seasonally adjusted number was higher, on an unadjusted basis claims were a bit better. Only 862.4K claims were filed this week compared to 868.1K the prior week. We would note that seasonality is very much on the side of claims for the current week of the year though. In the history of the data going back to 1967, there has only been one year, 1978, that the seventh week of the year has seen the unadjusted number move higher week over week. While unadjusted regular state claims were slightly better, factoring in Pandemic Unemployment Assistance (PUA) claims, the picture once again worsens. PUA claims saw a significant increase of 174.43K from last week rising to 516.3K. That is the highest level of PUA claims since the week of September 18th and the biggest one-week increase since mid-May. On a state level, though, there are some added quirks. Ohio was the single biggest contributor to that increase in PUA claims as the state reported 232,016 claims (or 44.9% of all national claims) compared to only 10,156 in the prior week. That's 2% of the state's entire population The next biggest contributor to PUA claims was California with only 38,052 claims. Even for just regular state claims, Ohio has led the pack with the highest level of claims of any state second to only California. Over the past two weeks, Ohio has reported regular state claims above 140K. That compares to an average for the state of 49.7K from March through the last week of January. When looking at these numbers, we would urge some caution taking them purely at face value given news of large-scale fraudulent claims. As for continuing claims, the same trends are still very much in place. Seasonally adjusted continuing claims which are lagged one week to initial claims fell for a fifth consecutive week and made another low for the pandemic period. At 4.494 million in the first week of February, regular state continuing claims were at the lowest levels since March 20th. Factoring in other programs adds an additional weeks' lag to continuing claims, and here too continuing claims improved. Total claims across all programs fell from 19.7 million for the week of January 22nd to 18.376 million in the last week of January. While sequentially better, total continuing claims have still hit a bit of a plateau for the time being. Additionally, extension programs like Extended Benefits and Pandemic Emergency Unemployment Compensation (PEUC) saw some of their most significant declines since the start of the pandemic; to a degree reversing what has been a trend of a growing prevalence of these types of claims. PEUC continuing claims fell by 718K on a week over week basis which was the second-largest drop behind the drop of over 1 million at the end of 2020 due to the expiration of benefits before being renewed shortly after. For the Extended Benefits program, the 196.9K decline was the biggest single-week decline of the pandemic.
Is A/D Line Signally Late-February Weakness? Back on January 21 in our February Almanac post our Market Probability Chart highlighted the pattern of late-February seasonal weakness. A disappointing jobless claims number today appears to be the straw the sent the market lower. In this chart of the NASDAQ 100 Index (NDX) I have overlaid the NASDAQ Composite Advance/Decline Line. The NASDAQ A/D Line peaked and flattened out about six trading days ago and is now heading lower. This coincides with the seasonal pattern of late-February weakness. However, we expect recent support to hold above 13,000. Should that level be breached major support exists around the old September doji high of 12,240. Considering how far the market has come in the face of some formidable economic and pandemic obstacles and how frothy sentiment had become, a little consolidation and pullback is to be expected. We may see some further weakness into month-end and into March, but with vaccine rollout gaining some traction, more stimulus likely and a supportive Fed we do not expect any major selloff at this juncture.
Best and Worst S&P 500 Stocks So Far in 2021 Mon, Feb 22, 2021 In the table below, we show the 30 best-performing stocks in the S&P 500 so far in 2021. Of the entire index, the two best-performing stocks come from the Communication Services sector and both have gained more than 70%. Discovery (DISCK) tops the list with a gain of 73.4% while ViacomCBS (VIAC) has surged 72.2%. Moving down the list, the next two best performers have been a couple of energy names with gains of more than 50%: Occidental Petroleum (OXY) and Marathon Oil (MRO). While they find themselves at the top of the list, they are far from alone. Of the 30 best performers, a third (including OXY and MRO) are from the Energy sector. One interesting thing to note of these names, while they have seen some of the strongest performance so far in 2021 and have nearly all more than doubled since the bear market lows last year, not a single one has yet to move back above levels they traded at when the S&P 500 peaked just before the COVID crash. Some are close, though, with Marathon Oil (MRO), Devon Energy (DVN), and Marathon Petroleum (MPC) all low-single-digit percentage points away from those levels. Additionally, absent from the list of the best-performing stocks are mega-cap names. In fact, of the top 30 best performers YTD, only two—Exxon Mobil (XOM) and Applied Materials (AMAT)—rank in the top 100 largest stocks in the S&P 500 in terms of market cap. Conversely, 12 rank in the bottom 100 stocks in the S&P 500. Flipping over to the worst-performing stocks in the S&P 500 this year, there are 17 stocks that have now fallen double digits. DaVita (DVA) is down the most of these with a decline of over 15%. Similar to the Energy sector's representation among the best performers, Health Care is the most prevalent sector among the worst performers; DVA being one of these. Additionally, the pattern of stocks with smaller market caps outperforming is evident in the worst performers in the S&P 500. The 30 best-performing stocks average a market cap of $34.68 billion while the worst performers average a market cap of $56.87 billion. Five of these worst-performing stocks rank in the top 100 largest stocks in the index while only four fall within the ranks of the smallest 100 S&P 500 stocks.
Consumers Still Stuck in a Rut Tue, Feb 23, 2021 The stock market and economy have both exhibited different degrees of v-shaped patterns over the last year, but one area where the v-shaped pattern has been noticeably missing involves Consumer Sentiment. The latest read on Consumer sentiment for the month of February showed a modest improvement from January's downwardly revised reading of 88.9. While economists were forecasting the headline reading to come in at a level of 90.0, the actual reading showed a modestly larger increase coming in at 91.3. Even as financial conditions and the economy improve and vaccines roll out, though, consumers remain stuck in a rut. Breaking out confidence by Present Conditions and Expectations shows the same trend. While sentiment towards the present has seen a bigger bounce off the lows, expectations continue to trend lower. At first glance, this seems strange given the improved trends regarding COVID case counts and the rollout of the vaccines, but then again, if you told most Americans a year ago that we'd still be at the current level of restrictions and closures, they wouldn't have believed you. Maybe the fact that expectations remain so muted is just consumers taking the attitude of, "I'll believe it when I see it." Another reason for the muted sentiment is the fact that the jobs simply aren't there yet. Like overall confidence, the 'Jobs Plentiful' index has barely bounced off its lows either. As long as jobs remain hard to find, don't expect consumer sentiment to improve much. One surprising aspect of this month's report concerned sentiment towards the stock market. While there's an overall abundance of bullish sentiment, the percentage of consumers in this survey expecting higher stock prices is barely higher than the percentage expecting lower stock prices. Normally, when the stock market makes record highs, consumers are bullish towards the market, this month, though, the lack of consumer enthusiasm even made its way into sentiment towards the stock market.
Post-Election Year March: Performance Slips to Bottom Half Tempestuous March markets tend to drive prices up early in the month and batter stocks at month end. Julius Caesar failed to heed the famous warning to “beware the Ides of March” but investors have been served well when they have. Stock prices have a propensity to decline, sometimes rather precipitously, during the latter days of the month. In March 2020, DJIA plunged 4011 points (-17.2%) during the week ending on the 20th. Normally a decent performing market month, post-election year payments to the Piper take a toll on March as average gains are trimmed noticeably (see Vital Statistics table below). In post-election years March ranks: 5th worst for DJIA, S&P 500, Russell 1000 and Russell 2000; NASDAQ is 4th worst. In 12 post-election years since 1973, NASDAQ has advanced six times, with three in a row 2009, 2013 and 2017.
Weak Tuesday After Big Gains on Monday Tue, Mar 2, 2021 With the S&P 500 rallying 2.38% yesterday, the index notched its best first trading day of a month since last March when it rose 4.6%. As we noted in last night's Closer, a strong start to a month has not necessarily been a great sign for the returns for the remainder of the month. Similarly, the next day has not been met with the best performance. As shown in the charts below, historically when the S&P 500 has rallied at least 2% on a Monday, Tuesday has seen a pullback with an average daily decline of 10 bps and positive returns only half the time. As for the rest of the week, Wednesday has been the only day to average a move higher with positive returns more than half the time. Thursday and Friday, on the other hand, have averaged declines of 6 and 7 bps, respectively, with positive returns only 48.68% of the time. Of these instances, including yesterday, there have been 13 times that the 2% or larger gain on a Monday also happened to be the first trading day of a month. On the Tuesday after these past occurrences, the S&P 500 has on average been flat with positive returns two-thirds of the time. Once again, Wednesday is the only day with an average gain and like Tuesday has seen positive returns two-thirds of the time. As for the second half of the week, returns are again negative with the weakest day being Friday which has averaged a 74 bps decline with positive returns only a third of the time.
Anatomy of a Bond Market Sell-off Tuesday, March 2, 2021 Coming into 2021, one of our higher-conviction ideas was that we would see rising long-term interest rates in the United States; it’s one of the reasons we recommended suitable investors consider an underweight to interest rate sensitive fixed income. However, we didn’t expect interest rates to move this high, this fast. The 10-Year Treasury yield started the year at 0.91% and ended the month of February at 1.41%, down from an intraday high of 1.61%. As such, core fixed income assets are off to one of their worst starts ever (remember that as yields go up, prices go down). “Core fixed income assets aren’t off to a very good start this year, but we don’t think investors should abandon high-quality fixed income assets as they play an important role in a diversified portfolio” says LPL Financial Chief Market Strategist Ryan Detrick. So what is driving interest rates higher? Changing expectations Inflation and growth expectations are important factors into the fundamental outlook for interest rates. Broadly speaking, what we’ve seen in the bond market this year is a re-pricing of both higher inflation and higher growth expectations. Inflation expectations have steadily moved higher, and market-based gauges of inflation expectations are the highest they’ve been since 2011. We don’t expect much higher inflation expectations from here, but we are watching how additional fiscal stimulus flows into the economy. Additionally, it seems increasing economic growth expectations have picked up recently as well. An increase in growth expectations may put pressure on the Federal Reserve (Fed) to move away from its low interest rate policy sooner than expected, which has put upward pressure on longer-dated Treasury yields. An unfortunate byproduct of those higher expectations is that we’ve seen an increase in the volatility of the 10-Year Treasury. As shown in the LPL Chart of the Day, daily percentage changes for the 10-Year Treasury yield are above historical norms (each vertical line on the chart represents the one day percentage change in the 10-Year Treasury yield). As shown, over the past several months, yields have regularly moved 10-20% in either direction on any given day. We think this is due to the changing interest rate dynamic and believe that interest rate volatility will subside the further we get into this new interest rate regime.
Brazil (EWZ) Beaten and Battered Wed, Mar 3, 2021 Looking across the country ETFs from the 23 countries tracked in our Global Macro Dashboard, most countries have pulled back in the past week though they remain up on the year. But one notable exception has been Brazil (EWZ). EWZ has gotten crushed falling 11.24% in the past five days alone and is now in a new bear market with a 20%+ drop from its 52-week high. Given these steep declines, the ETF is deeply oversold at nearly 3 standard deviations below its 50-DMA. There are only two other country ETFs that are currently oversold: Malaysia (EWM) and Switzerland (EWL). Granted, neither of these are nearly as oversold as EWZ. In fact, EWM is on the cusp of moving out of oversold territory. In addition to these countries, Mexico (EWW) is the only other one that is down year to date. While Brazil is down double digits this year, Taiwan (EWT) has risen over 11.5%. It is the only country ETF to have gained double digits so far this year while South Africa (EZA) and Sweden (EWD) are both closing in on doing the same. China (MCHI) is the next best-performing country this year, but it sits much further below its 52-week highs than the other top performers in 2021. Since the mid-February high, MCHI has fallen 9.6%. In recent days, that decline is resulting in a test of its 50-DMA.
NDX January Support Broken, September Support Tested On the technical front we continue to track the big tech leading NASDAQ 100 Index (NDX). Recent selling has breached support levels at 13,000 and 12,720 as shown in the orange and blues line in the accompanying NDX chart. NDX 12720 is right at the mid-December/early-January consolidation level as well as December pivot-point resistance (red dotted line) and the January monthly pivot point (blue dotted line). The old September high of 12420 (black line) still holds as major support, but was tested today. It is just below the 10% correction level from the February 16 high of 13,774. If the 12420 support level is broken the next levels of support are shown in the red lines. First is ~12000 around the October highs in the midpoint (black 2) of the W-123 bottom and November consolidation. Next is ~11500 in the early November gap up. Then ~11000 at the October lows (black 3) endpoint of the W-123 bottom and then ~10750 (black 1) at the first point of the W-123 bottom.
Jobless Claims Weaker Under The Surface Thu, Mar 11, 2021 After a small uptick last week, initial jobless claims have resumed their move lower coming in at 712K this week and 13K below expectations. The 42K decline from last week's upwardly revised reading (745K previously to 754K) entirely erased the prior week's 18K increase as claims now stand just 1K above the pandemic low of 711K reached in the first week of November. While that is still a historically elevated reading, it is only within 17K of the pre-pandemic record of 695K. While the adjusted number is just off the pandemic low, on a non-seasonally adjusted basis claims did reach a new low. At 709.5K, claims have taken out the previous 716.6K low from two weeks ago. From a seasonal perspective, declines during the current week of the year are the norm. Historically, the current week of the year (10th) has seen claims fall two-thirds of the time. Adding in Pandemic Unemployment Assistance (PUA), the improvement in claims data was less impressive. PUA claims were actually higher by 41.86K on a week over week basis bringing total claims between that program and regular state claims to 1.188 million from 1.193 million last week. That is still roughly 181K above the pandemic low from early November and little changed from the past few weeks' readings. On a state-level basis, while a majority of states continue to report lower initial claims for both programs, the single biggest contributor to national claims continues to be Ohio. Ohio reported 126.9K regular state claims which is 20K more than the next biggest contributor, California (105.9K). For PUA claims, Ohio's 261.7K claims in the most recent week are over 45K more than the combined total PUA claims for all other states and territories. For continuing claims, things are a bit less extreme with Ohio only accounting for 4.13% of all regular state continuing claims and 8.67% of total PUA continuing claims. Like initial claims, continuing claims have also continued to improve, coming in below expectations (4.144 million vs. 4.2 million expected) which was also a new low for the pandemic. The 193K decline was the eighth weekly decline in a row as claims have fallen every week except for three in the past half-year. Including all programs adds an extra week's delay to the data. For the data as of the week of February 19th, total claims were an entirely different story as they rose by over 2 million rising back above 20 million for the first time since early December. That week saw an uptick across programs, but the biggest factors were PUA claims and Pandemic Emergency Unemployment Compensation (PEUC) which rose by 1.058 million and 986.35K, respectively. For PUA claims, that was the largest increase since January 8th when there was some catch-up following the signing of the spending bill.
B.I.G. Tips - Retail Sales Whiplash Tue, Mar 16, 2021 Viewed in isolation, the February Retail Sales report was terrible. With headline sales falling 3% on a month/month basis, it was the fifth-worst headline print in the history of the report going back to 1992. The only months that were worse were two in 2008 and two in 2020. Aren’t we supposed to be on our way out of the crisis?
Sentiment Holding Back Homebuilders Tue, Mar 16, 2021 The National Association of Home Builder's measure of homebuilder sentiment fell again in March. Although the index's 2 point decline down to 82 leaves it 8 points off the November record high, the current level of sentiment is still a few points above the pre-pandemic record high. A decline in present sales drove that decline as the index fell 3 points from 90 to 87. As with the headline number, although that is a decline from the peak of 96 in November, the current reading is still above anything recorded prior to the pandemic. Additionally, considering the indices for Future Sales and Traffic have held up better, that decline in Present Sales does not necessarily point to a broader downturn in demand. Even though Present Sales were lower, the index for Future Sales rose by 3 points recovering the ground lost in February while Buyer Traffic also avoided a decline as that index went unchanged from February. Again rather than a broader deterioration of conditions, the decline in Present Sales could be a result of issues like rising prices of things like lumber and higher mortgage rates which in turn means overall higher costs of a new home. The South was the only region to avoid a decline in March. That index held steady at 82 for the third month in a row. The Northeast also fared a bit better than the other regions as the index only fell one point from last month's level that was tied with October for a record high. The Midwest and the West fell more sharply with each index dropping 3 points. Regardless of those declines, both indices continue to come in at historically strong levels. With the weaker headline release providing a bit of a headwind in terms of catalysts, the iShares Home Construction ETF (ITB) is fighting to break out and hold above its early February highs today. Last week it unsuccessfully tried to take out resistance, but still remains right below its prior highs. Looking across S&P 1500 homebuilder stocks, there are two in our Trend Analyzer tool that currently earn "good" timing scores: TopBuild (BLD) and NVR (NVR). Whereas the broader group is testing 52-week highs, BLD and NVR are some of the few that are not currently overbought having recently pulled back a bit. After taking a brief dip below its 50-DMA late last month, BLD has been fluctuating around its moving average over the past few days. NVR on the other hand was unsuccessful in breaking out last week which was followed by a successful bounce off of its 50-DMA yesterday.
Leading Indicators Remain Stubbornly Tepid Friday, March 19, 2021 In almost every direction we turn, we see optimism mounting over a mid-2021 economic reacceleration. Unfortunately, it seems we will have to wait at least another month for that optimism to make their way into leading economic indicators in a major way. On Thursday, March 18, the Conference Board released its February 2021 report detailing the latest reading for its Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special ettention to the LEI, as it has a forward looking tilt to it. The index grew for the tenth month in a row, up 0.2% month over month in February, a decrease from January’s 0.5% pace. While this print still suggests future economic growth ahead, it fell short of expectations that had begun to price in an economic reacceleration on the back of improving vaccination trends. The Conference Board did make special note that factors which may prove to be transient, such as bad weather and related supply chain disruptions, did affect several component indexes. Moreover, it stated that the recently passed $1.9 trillion fiscal stimulus plan, a similarly large economic growth factor to vaccine progress, was likely not yet fully priced into the LEI’s value. Six of the ten components grew in February, while three declined and one remained flat. Average weekly initial claims for unemployment insurance, the ISM New Orders Index, and the interest rate spread led the way among positive contributors. Building permits, average weekly manufacturing hours, and average consumer expectations for business conditions detracted from the composite’s growth, while manufacturers’ new orders for nondefense capital goods excluding aircraft held steady. As seen in the LPL Chart of the Day, despite some small head fakes, the monthly change in the index has generally sloped downward since its initial bounce off of the 2020 lows. This signals the index has been increasing at a decreasing rate, as COVID-19 mitigation measures have prevented a full-fledged resurgence. We expect this trendline to turn meaningfully upward once a durable reopening begins to gain traction. “In recent months, financial markets have been agressively pricing in a strong second leg to this economic recovery,” said LPL Financial Chief Market Strategist Ryan Detrick. “We are still waiting for much of the economic data to confirm the move, but believe it should not be far off given the extremely promising vaccination trends and large fiscal package that was just recently passed. We think it is a matter of when there is a surge in US GDP growth, and not if there will be a surge.” We continue to believe that vaccinations are the key to a sustained recovery and distribution trends have been truly remarkable recently. The most at-risk segment of the population is largely vaccinated already and at this point, more people in the United States have been vaccinated than have contracted the virus. We now have three vaccines approved for emergency use authorization, and President Biden projects that we will have enough vaccine supply for every adult American by late spring. Furthermore, we have increased confirmation that vaccines appear to be effective at preventing transmission as well as symptoms. While growth of variant strains does present a risk, we believe the overwhelming majority of evidence points toward a promising second leg of this economic recovery, which we believe justifies a tilt toward cyclical opportunities over defensive investments in portfolios.
February: Short But Weak Mon, Mar 22, 2021 With elevated COVID cases and a major winter storm that paralyzed much of the south, February was a speed bump for the US economy. The latest example comes from this morning's release of the Chicago Fed National Activity Index (CFNAI). From the website of the Chicago Fed, "The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend." The release for February showed considerable weakness falling from a strong reading of 0.75 in January to -1.09 in February. The chart below shows historical readings of the CFNAI index dating back to 1970 with recessions highlighted in gray and a red line indicating the current reading for February. Because of the major swings we saw in this index around the COVID outbreak last year, this chart is pretty useless in terms of looking at the current data to see how it compares to prior periods. In order to get a better view, in the chart below we have cut off the y-axis to leave out the extreme readings from 2020. Looking at it this way shows just how weak February was. Looking back, just about every prior occurrence where the CFNAI was below -1 the US economy was in a recession. Besides the period in 2020, the last times this index was at similar levels was during the Financial Crisis, during the dot-com recession, the 1990 recession, and then the double-dip recession of the 1980s. Noticing a trend? The table below shows every month where the CFNAI was less than negative one (-1). Since 1970, out of 612 monthly readings, there have only been 37 months that the index was below -1. Of those 37 months, there have only been two (Jan 1978 and April 1979) that occurred when the US economy wasn't in a recession. Technically, since the NBER has yet to confirm an end date, the US economy remains in the COVID recession, but most would agree that when the time comes, the recession will likely have ended in the second or third quarter of 2020 which would make February just the third month since 1970 that the CFNAI was below -1 outside of a recession. In other words, in just about any other time but now, an overheating economy would be the last thing people would be worried about right now given a negative reading of this magnitude in the CFNAI.
Mean Reversion After Biggest 1-Year Spike Since 1949? Lots of chatter out there about the giant 1-year gain of 75% on the S&P 500 from the March 23, 2020 low – actually it’s 74.78%. It may very well be the beginning of a new bull market, but that does not mean (pun intended) that we should expect gains like these moving forward. We ran the numbers on the 1-year rolling returns for the S&P 500 back to 1949 and while these giant spikes do come at the early stages of extended bull runs gains of this magnitude have not been sustained and the market has tended to revert to the mean. The arithmetic mean or average rolling 1-year return since 1949 is 9.15%, which isn’t bad either. With lingering pandemic/vaccine and political and geopolitical issues, all the noise from the Fed and the bond market, Robinhood and Reddit stock pumping, rich valuations, teetering internals, extended technicals – and the end of the Best Six Months November-April on the horizon, it is not inconceivable to expect the market to consolidate over the Worst Six Months May-October (AKA “Sell in May”). Last time we had a 1-year rolling return of this magnitude in 2010 when the S&P was up 68.57% on March 9, 2010 from the March 9, 2009 secular bear market low we had a 10.34% correction to the July 2, 2010 low and a 15.75% rolling 1-year return from March 9, 2010 to March 9, 2011. And let’s not forget the May 6, 2010 flash crash. So while we are by no means “bearish” perhaps a little caution and portfolio defense in the near future is not a crazy idea.
End Best Six Months Rally Sets Up “Sell in May” Recent weakness following the Ides of March arrived on cue with historical seasonal trends as you can see in the chart above of the “S&P 500 One-Year Seasonal Pattern Since 1949.” Weakness the week after Triple Witching and at the end of March is rather typical as we have discussed on this blog and as is detailed in the Stock Trader’s Almanac 2021. The last several days of March often succumb to end-of-Q1 selling pressures. Late-March weakness has frequently been recovered early in April. The first couple of trading days of April have delivered already. The last month of our “Best Six Months” is now upon us. So it’s the perfect time to provide a refresher for longtime readers and primer for those that have recently joined us. We do not simply “Sell in May and go away.” We employ a more nuanced and subtle approach to how we implement our Best & Worst Months Switching Strategies. We are not issuing the signal at this time. As we prepare for our upcoming Best Six Months Seasonal MACD Sell Signal that can occur any time on or after April 1 there are several factors and aspects of the strategy we’d like to be sure you’re up to speed on. DJIA’s and S&P 500’s “Worst Six Months” are May through October. NASDAQ’s “Worst Four Months” are June through October. We begin tracking DJIA and S&P 500 for our “Best Six Months” MACD Seasonal Sell Signal on or after April 1. We begin tracking NASDAQ for its “Best Eight Months” MACD Sell Signal on or after June 1. We will issue our Seasonal MACD Sell Signal when corresponding MACD Sell indicators applied to DJIA and S&P 500 both crossover and issue a new sell signal on or after April 1. We will not be issuing our NASDAQ Best Eight Months MACD Sell Signal until on or after June 1. Historical dates for the “Sell Signal” can be seen in the tables under the “Our Strategy” tab on the website. When we issue our DJIA and S&P 500 Seasonal Sell Signal Almanac Investor eNewsletter subscribers will receive an email Alert after the close that day. At that time we will either sell associated positions outright or implement tight trailing stop losses. Additional bearish/defensive positions in: iShares 7-10 Year Treasury (IEF), iShares 20+ Year Treasury (TLT), iShares Core US Aggregate Bond (AGG), Vanguard Total Bond Market (BND), ProShares Short Dow 30 (DOG), ProShares Short S&P 500 (SH) and/or other protective strategies may also be considered. All current stock and ETF holdings will be reevaluated at that time. Weak or underperforming positions can be closed out, stop losses can be raised, new buying can be limited and we will evaluate the timing of adding positions in sectors that perform well in the Worst Six Months and presenting subscribers with a new basket of defensive stocks. Now that those end-of-Q1 pressures have been alleviated we expect April to deliver its usual upside performance. In fact, recent weakness sets up well for an April rally. An April rally would in turn set up a solid Best Six Months MACD Seasonal Sell Signal. With only 7 S&P 500 losses in the last 31 years, April has been a consistent performer. April is the first month of the second quarter and welcomes in the new earnings season, which promises to help buoy stock prices as year-over-year comparisons should be improved over last year’s Covid-impacted numbers.
Mixed Claims Picture Based on Program Thu, Apr 8, 2021 Initial jobless claims were expected to fall to 680K this week, which would have been just 22K above the pandemic low set two weeks ago. Instead, claims ticked higher for a second week in a row to 744K. Additionally, last week's print of 719K was revised higher to 728K. On a non-seasonally adjusted basis, the current week of the year (14th week) typically sees a higher reading in jobless claims. In fact, since 1967 when the data begins, the current week of the year has seen a week over week increase in initial claims 88.9% of the time. Of all weeks of the year, it is the third most consistent in experiencing higher claims. Given this seasonality, unadjusted claims rose 18.2K from last week. Although higher sequentially, that is still at the lower end of the past year's range. Pandemic Unemployment Assistance (PUA) made up for that weakness, though. PUA claims fell by over 85K to a new pandemic low of 151.75K. That meant on a combined basis (regular state claims plus PUA claims), initial jobless claims were just slightly above the past year's low from two weeks ago. Continuing claims were also better this week falling to a new low of 3.734 million. While that marked the twelfth week in a row that claims have fallen and any new low is certainly welcome, we would note that the pace of improvement has decelerated. As shown below, continuing claims have been flattening out recently with this week's 16K decline in seasonally adjusted continuing claims a prime example. That 16K improvement actually marked the smallest decline of the past year. The most recent data factoring in all other unemployment programs is through the week of March 19th. Total claims were somewhat flat for that week with only a small decline from 18.249 million to 18.196 million. Big declines in regular state claims (-134.5K) and the Extended Benefits program (-230.78K) were largely offset by sizeable increases in PUA claims (+203.29K) and Pandemic Emergency Unemployment Compensation (+117.11K). In other words, the picture can be painted as improving or more of the same depending upon which program you are looking at. In the past, we have noted the changing composition of continuing jobless claims with extension-based programs like Extended Benefits and PEUC taking up an increased share of total claims. For the most recent week, that picture is a bit mixed up. While the 230.78K decline for the Extended Benefits program meant these claims fell to the lowest since early December at 787K, PEUC claims (which is also a larger program with 5.6 million claims) were higher and in the middle of the past several weeks' range. Together, these two extension programs' share of total claims has peaked for the time being but still account for over 35% of total continuing claims.
