Weekly Trader’s Outlook

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Weekly Market Review

Earnings Summary

The regular Q2 earnings season is over and Q3 earnings season really doesn’t start for about 3 more weeks. However, since not all companies follow a regular calendar quarter, this week 5 S&P 500 companies reported earnings and 3 of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 15 (3%) of the companies in the S&P 500 have reported Q3 results so far. I’ll begin reporting the aggregate beat rates relative to the final results from recent quarters, as soon as Q4 begins next week.

Quarter

EPS beats      

Rev beats

Q3 '22

0%

0%

Q2 '22

75%

63%

Q1 '22

76%

67%

Q4 '21

76%

69%

Q3 '21

82%

68%

Q2 '21

86%

83%

Q1 '21

87%

72%

Q4 '20

78%

69%

Q3 '20

84%

74%

Q2 '20

85%

65%

Q1 '20

65%

59%

Average

80%

70%

From a growth standpoint, Q3 earnings are expected to be +2.9% y/o/y, now that the quarter has ended. Q3 revenues are expected to be +8.7% y/o/y, now that the quarter has ended. This compares to final growth rates of +7.3% and +13.7% respectively in Q2.

Economics Recap

Better (or higher) than expected

  • Consumer Confidence for Sep: 108.0 vs. 104.6 est
  • New Home Sales for Aug: 685k vs. 500k est
  • Initial (weekly) Jobless Claims: 193k vs. 215k est
  • Personal Spending for Aug: +0.4% vs. +0.2% est
  • Core PCE Prices for Aug: +0.6% vs. +0.5% est

On Target

  • GDP Final for Q2: -0.6% vs. -0.6% est
  • Personal Income for Aug: +0.3% vs. +0.3% est

Worse (or lower) than expected

  • Durable Goods Orders for Aug: -0.2% vs. -0.3% est
  • Case-Shiller Home Price Index for Jul: +16.1% vs. +17.1% est
  • Pending Home Sales for Aug: -2.0% vs. -1.5% est
  • Chicago PMI for Sep: 45.7 vs. 51.8 est
  • University of Michigan Consumer Sentiment for Sep: 58.6 vs. 59.5 est

This was a busy week for economic data. At just 193k, Initial Jobless Claims came in well below expectations. Not only were they below 200k, they were the lowest since late-April; exactly the opposite of what the Fed would like to see. Claims are now averaging just 207k for the past 4 weeks; 9k below last week. This is less than the pre-Covid average of 210k.

3-year Initial Jobless Claims chart

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

Market Performance YTD

While the modest 8.5% YTD rise in West Texas Intermediate Crude (WTI) prices is well off its +64% peak (reached in early-March) the Energy sector is still sharply outperforming all other sectors YTD, and is back to being the only positive performer.

Here is the 2022 YTD (versus 2021 full-year) performance of the market broken down by the 11 market sectors (as of the close on 9/29/22):

 

2022 YTD

2021 Final

Category

1. Energy

+31.9%

+47.7%

Defensive

2. Utilities

-6.7%

+14.0%

Defensive

3. Cons Staples

-12.0%

+15.6%

Defensive

4. Healthcare

-12.9%

+24.2%

Defensive

5. Industrials

-20.7%

+19.4%

Cyclical

6. Financials

-21.6%

+32.5%

Cyclical

7. Materials

-24.6%

+25.0%

Cyclical

8. Consumer Disc

-29.0%

+23.7%

Cyclical

9. Info Tech

-30.6%

+33.4%

Cyclical

10. Real Estate

-31.1%

+42.5%

Cyclical

11. Communications Svc

-38.4%

+20.5%

Defensive

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2022 YTD (versus 2021 full-year) performance of the major U.S. equity indices (as of the close on 9/29/22):

 

2022 YTD

2021 Final

Forward P/E Ratio

S&P 500 (SPX)

-23.6%

+26.9%

16.3    

Nasdaq Composite (COMPX)

-31.3%

+21.4%

24.1

Dow Industrials (DJI)

-19.5%

+18.7%

15.7

Russell 2000 (RUT)

-25.4%

+13.7%

20.9

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Technicals

If you read this report regularly, you know that I expected the 6/16 low to be tested, but ultimately hold; it didn’t. With a decline of 665 points (-15.4%) since mid-August, as of Thursday’s close (9/29) the SPX was 26 points (-0.7%) below the mid-June bottom and at a new YTD low. I’ve mentioned numerous times in the past that the SPX would need to close above 4,399 before it closed below 3,666 in order for the bear market to end on 6/16; that didn’t happen. As a result, the bear market that began on 1/3/22 continues.

It is quite unusual for the 56% retracement (from 6/17 through 8/16) to be entirely negated, but these are not usual times. Depending upon where it goes from here, 9/29 is now the earliest date the bear market could end and (as shown in the chart below) the target to start a new bull market is now 4,368; +20% from the 9/29 close (3,640). And, this will change again in the coming days, if the SPX closes below 3,640.

6-month candlestick chart of the S&P 500 Index

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Additionally, while the SPX, Nasdaq Composite (COMPX), and Russell 2000 (RUT) all entered bear market territory (-20%) earlier this year, the last of the major indices, the Dow Jones Industrial Average (DJI), finally fell into bear-market territory this week too.

Bull and Bear Markets

With the arrival of a new low, this seems like a good time to publish an update of the Bear Market table. In the post-WWII era, with a cumulative decline of -24.1% so far, this bear market ranks 10th out of 12 with regard to the magnitude of the decline; at 269 days in length, 8th longest in duration.

table of bear markets since WWII

Option Volumes

As the month comes to a close, September option volume is averaging a very strong 43.3M contracts per day. That is above the final August level of 39.7M, and above the September 2021 level of 38.9M contracts per day. The all-time record of 45.2M contracts per day was set in November 2021.

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 15% of all equity options are traded:

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

  • VIX call OI was +13.3%                   
  • VIX put OI was +25.0%                    

Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These changes are not only 5x to 10x normal levels, they also reflect a very large bias toward the put side, so I see the VIX OI Change as bullish for the market in the near-term.    

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

  • SPX call OI was +8.4%         
  • SPX put OI was +7.2%                      

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

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

  • ETP call OI was +7.8%                     
  • ETP put OI was +4.9%                      

The aggregate changes in Exchange Traded Products options reflect a clear bias toward the call side, so I see the ETP OI Change as 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 +3.2%                  
  • Equity put OI was +2.5%                  

Equity volume tends to have a large retail component to it. 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.

Open Interest Participation

Index OI Participation is +22.7% versus 2021 levels, so I see it as bullish in the long-term.

Equity/ETF OI Participation is +2.6% versus 2021 levels, so I see it as neutral in the long-term.

Open Interest Put/Call Ratios (OIPCR)

The VIX OIPCR is up 5 ticks to 0.35 versus 0.30 last week. Since this ratio tends to move in the same direction as the VIX index, this uptick is consistent with the VIX which was +1.92 (+6.4%) over the last 4 sessions. As a result, it may imply that traders are expecting the VIX to ease up a little in the near-term. Therefore, I see the VIX OIPCR as moderately bullish in the very near-term for the markets. This ratio has been relatively stable over the past 8 weeks, though it remains well below the 200-day SMA of 0.51. Therefore, I see it as neutral in the long-term for the markets.

The SPX OIPCR is down 2 ticks to 1.76 versus 1.78 last week. This ratio tends to move in the same direction as the SPX, so this uptick is somewhat inconsistent with the SPX which was -52.76 points (-1.4%) over the last 4 sessions. As a result, it implies that SPX option traders (who are almost entirely institutional) have moderately decreased their hedges this week and may be preparing for at least a small uptick in the SPX sometime soon. Therefore, I see the SPX OIPCR as moderately bullish in the near-term for the market. This ratio has been rather stable for the past 90 days, and it is now only 8 ticks below the 200-day SMA of 1.84. I see it as neutral in the long-term.

The normally very stable Equity OIPCR is down 1 tick to 0.82 versus 0.83 last week. At this level, this ratio has pulled back quite a bit from a 21-month high of 0.89 (in mid-August) and it likely implies that equity option traders (which includes a lot of retail traders) are feeling only slightly less bearish. However, retail traders tend to be on the wrong side of things and this ratio tends to be a contrarian indicator, so I see the Equity OIPCR as moderately bullish in the near-term for the market. This ratio is now right at the 200-day SMA (currently 0.82), so I see it as neutral in the long-term.

Cboe Volume Put/Call Ratios (VPCR)

The Cboe VIX VPCR has been all over the place this week. It was below 0.20 on Monday (9/26), the 0.47 reading on Thursday (9/29) was neutral, and the current reading of 1.56 as I'm writing this (mid-day Friday 9/30) is bullish. While intraday levels tend to decline as the day goes on, with such wild swings the only logical reading is volatile in the very near-term.

The Cboe SPX VPCR has been mostly neutral this week. The 1.40 reading on Thursday (9/29) was neutral, and the current reading of 1.30 as I'm writing this (mid-day Friday 9/30) is neutral. While intraday levels tend to decline as the day goes on, I see it as neutral in the very near-term. With a 5-day moving average of 1.54 versus 1.43 last week, it is also neutral in the long-term.

The Cboe Equity VPCR has moved from moderately bearish (>0.73) to a bearish extreme (>0.83) this week. The 0.91 reading on Thursday (9/29) was a bearish extreme, which has often (but not always) preceded a short snap-back rally by a day or two. The current reading of 0.96 as I'm writing this (mid-day Friday 9/30) is also a bearish extreme. Such rallies tend to be very short-lived, and if the market closes sharply higher on Friday (9/30) may already be over by the time you read this, or it may last day or two. Therefore, I see it as bullish in the very near-term. With a 5-day moving average of 0.85 versus 0.71 last week, it is bearish in the long-term.

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 moderately bearish (>1.10) for most of this week. As a result, I see it as moderately bearish in the near-term. It has been moderately bearish in 12 of the last 15 sessions, so I see it as moderately bearish in the long-term.

The OCC Equity VPCR has been at a bearish extreme (>1.00) all week. At such extremes, this ratio can become a contrarian indicator. As a result, I see it as bullish in the very near-term. The 5-day average is 1.10 versus 1.03 last week. Similarly, extreme levels can sometimes (though not always) signal market reversals, and this ratio was at a similar level on 9/6 (which preceded a +3.3% rally over 4 sessions) and in mid-June (which preceded a +17% rally over 60 days). Therefore, I see it as bullish in the long-term too.

Volatility

Cboe Volatility Index (VIX)

At the time of this writing (mid-day Friday 9/30), the VIX is -1.44 to 30.40. At its current level, the VIX is implying intraday moves in the SPX of about 59 points per day (this was 56 last week). The 20-day historical volatility is 93% this week versus 98% last week. The VIX has been above its long-term average (19.57) for the past 6 weeks now, and still well above its long-term mode (12.42) which I consider to be “normal” volatility.

After remaining in the 20’s for about 90-days (from mid-June through mid-September), the VIX rose to within 5 points of its YTD high this week. At its current level, I see the VIX as volatile in the very near-term for the equity markets. While the longer-term trend in the VIX suggests rising uncertainty/anxiety, it has not yet reached the point of panic (>40) which has occurred in every other bear market since the VIX was first launched 29 years ago. At the time of this writing (mid-day Friday 9/30) the VIX is nearly 5 points below its weekly high, and it is well above its long-term average. I see it as moderately bearish in the long-term.

On a week-over-week basis, VIX call prices have risen modestly and VIX put prices have risen modestly. At +2 versus +2 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is unchanged, and at this level is bullish in the very near-term. Longer-term, VIX call prices have been trending lower for the past 5 weeks, whereas VIX put prices have been trending modestly higher. At these levels I see the VIX IV Gap as moderately bullish 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

At the time of this writing (mid-day Friday 9/30) the nearest VIX futures contract (which expires on 10/5) was trading at 31.70; more than a point above the spot VIX level of 30.40. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 31.09; less than a point above the spot price.

With the VIX above 30 and an adjusted level that is less than a point above the spot price, futures traders are indicating that they believe the VIX is likely to remain mostly flat 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 28.82 and 26.79 respectively. With the RPAPs of the further-dated contracts both well below the spot VIX, I see VIX futures as moderately bullish 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 holding above 30 all week, the VIX Hedging Effectiveness has been Good in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing at fairly good sensitivity to market volatility, and may be reasonably 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.

Cryptocurrencies

In response to the executive order issued by President Biden back on 3/9/22, requesting that 20 different federal agencies research and make recommendations on cryptocurrencies, the Office of Science and Technology released a report titled, “Climate and Energy Implications of Crypto-Assets in the US” on 9/8/22. The 36-page report covered many topics; a few of their findings are summarized here:

  • Crypto-assets use a lot of electricity
    • 120 to 140 billion kilowatt-hours per year; more than the annual consumption of countries the size of Argentina or Australia
    • Approximately 0.4% to 0.9% of annual global electricity usage
  • Different crypto-assets use different amounts of electricity
    • Bitcoin accounts for 60% to 77% of all electricity usage
    • Ethereum accounts for 20% to 39% of all electricity usage (Note: this was calculated prior to the 9/15/22 “Merge” which converted Ethereum from a Proof-of-Work (PoW) to a Proof-of-stake (PoS) consensus protocol that is expected to cut energy usage by >99%
  • Electricity generation contributes to climate change
    • Electricity used by Crypto-assets equates to 0.3% of global annual greenhouse gas emissions
  • Blockchain technology could help support climate mitigation technologies
    • But only if the net positive effect exceeded the net negative effects
    • Consumer energy costs must not increase, reliability of electric grids must be maintained, equity, communities and the environment (including air, water and noise) must not be harmed

For Schwab's perspective on cryptocurrencies, please visit: www.schwab.com/cryptocurrency

Economic reports for next week

Mon 10/3

Construction Spending for Aug – Construction spending measures new overall construction activity. This report can predict future activity in housing and commodities, which can be a sign of economic growth.

ISM Manufacturing Index for Sep - The Institute for Supply Management (ISM) Manufacturing Index tracks economic data from companies in the manufacturing sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the manufacturing sector are on the rise. 

Tue 10/4

Factory Orders for Aug – This report includes both durable and non-durable goods orders, as well as wholesale and retail inventories. Like the construction report, it usually doesn’t impact the market much.

Wed 10/5

ADP Employment Change for SepThe ADP report is based on information from approximately 400,000 U.S. businesses and 23 million U.S. employees in the private sector. While the ADP report is often looked at as a predictor of the BLS (Bureau of Labor Statistics) nonfarm payrolls report, ADP data does not include government jobs, so there is sometimes a significant difference between the two.

International Trade (Trade Balance) for AugThis report tracks trends in the exports and imports of goods and services. Exports can indicate economic expansion both in the U.S. and abroad. Imports can indicate growing domestic demand. However, this is a lagging report so it rarely has any impact on the market.

ISM Services Index for Sep – The Institute for Supply Management (ISM) Non-Manufacturing Index tracks economic data from companies in the services sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the services sector are on the rise.

Thu 10/6

Initial Jobless Claims - For the week ending 9/24/22, claims were down 16k after being up 1k the prior week. The 4-week moving average now stands at 207k, down from 216k the prior week.

Fri 10/7

Monthly Employment Situation for Sep – This group of reports, typically released on the first Friday of the month, is the broadest monthly view of the labor market. It includes:

  • Nonfarm Payrolls
  • Unemployment (U-3) Rate
  • Average Hourly Earnings
  • Average Workweek
  • Underemployment (U-6) Rate
  • Labor Force Participation Rate

Wholesale Inventories for Aug – This report covers manufacturing inventory data, so it is not a good indicator of consumer activity, but it may have ramifications on future GDP levels.

Interest Rates

As widely expected, the Fed raised interest rates +0.75% last week Wednesday (9/21). But as you can see in the table below, unlike the four previous rate hikes that have occurred this year, equities sold off. And not just on that day but in the next 4 sessions too.  

Fed Date

Interest Rate

SPX

Next Day SPX

3/16/22

+0.25%

+2.24%

+1.23%

5/4/22

+0.50%           

+2.99%

-3.56%

6/15/22

+0.75%

+1.46%

-3.25%

7/27/22

+0.75%

+2.62%

+1.21%

9/21/22

+0.75%

-1.72%

-0.83%

Source: Schwab Center for Financial Research

Past performance is no guarantee of future results.

The Fed has increased its target rate by a full 3.0% in only 6 months; the fastest pace in 40 years; they aren’t done yet. The next FOMC meeting is 11/2 and the Fed Funds Futures probability of another 0.75% rate hike on that day is currently 66%. However, there will be another CPI and PPI report before that date, so the probability will change many times in the interim. The interest rate on the 10-year treasury ($TNX) began the week around 3.78%, rose to as high as 3.99% by mid-week, and the reversed back down toward the end of the week. It is currently around 3.75% at the time of this writing (mid-day Friday 9/30).

Outlook

Despite a very hawkish Fed, plenty of unfavorable economic data and all of the major indices reaching bear market territory, the indicators imply that as the start of Q4 arrives, an oversold rally could be on the horizon. Exact timing however, is always difficult to pinpoint.

Bottom Line

Occasionally when I write this report (now in its 14th consecutive year of publication) I am surprised at the outcome; this week is definitely one of those weeks. Despite the equity markets falling to YTD lows, volatility approaching YTD highs, Fed commentary seemingly more hawkish every day, and no lack of analysts and economists forecasting a deeper recession and harder times to come, the indicators I cover in this report almost universally contradict that overwhelmingly bearish perspective. If there was ever a time when everything is so bearish that it must be bullish, this certainly seems like that time. About the only indicator NOT flashing a contrarian bullish signal is the VIX, which (as discussed in the Volatility section above) has not yet reached the panic level of 40 this year.  

As you can see below, there were 4x the number of upgrades as downgrades in the indicators this week, and they overwhelmingly point to a high probability of an oversold Bullish rally next week. But since no indicator(s) or forecast are always right and exact timing (both when/if it may begin and how long it may last) can be tricky, please exercise due diligence, be very cautious, and don’t take unnecessary risks.

Composite Market Sentiment

Composite table of the market sentiment indicators for this week

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.

Issue Number: 661

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