A second consecutive day of overwhelmingly positive price discovery has just about erased all headline level domestic equity index losses sustained by U.S. markets since Thanksgiving. This week alone, the S&P 500... on successive days, has retaken both its 50 day SMA and 21 day EMA. The Nasdaq Composite managed to take down both of those lines on just Tuesday. By the way, these past two sessions were the hottest two day set for U.S. equities, as measured by these broadest of large cap indexes in percentage terms since at least February of this year (Nasdaq Composite), or November of last year (S&P 500).
Breadth remained minty fresh, as winners beat losers by more than seven to two at both the NYSE and Nasdaq Market Site. Advancing volume comprised 83.7% of the composite for names listed at the "Big Board", while comprising 81.7% of composite Nasdaq-domiciled trading volume. The only real negative caveat would be that aggregate trading volume again contracted on Tuesday from Monday, as it had on Monday from Friday. As many of you know, there may or may not have been a serious turning point (for the better) in the flow of capital, but we really do need to see higher prices on increased trading volume to feel comfortable in declaring the twin threats posed by the central bank's possible/probable accelerated pace of removing accommodative policy and the still not so well understood trajectory of the Covid pandemic.
Sarge, What Are You Saying?
What I am trying to tell you, is this: While this two day rally may indeed be the real thing, I can not relax in the knowledge that it is just yet. I hear younger traders speak. They are largely excited and, this is very anecdotal, and taken from a very small sample size, have re-engaged with net long positions, not only expecting a "Santa Claus" rally, but in some cases, mistakenly identifying this week's action as the start of the famous year end phenomenon. Just a heads up for the new kids, the "Santa Rally" does not kick off until the last five trading days of the year and runs through the second trading day of the new year. This rally is very nice (Heck, I run a net long, in fact "very net long" book), but this ain't that.
Let's try to maintain an objective perspective. (Hmm... objective perspective, kind of like the way that sounds. May walk around repeating that today.). The Fed does not even step to the plate until next Wednesday. We still do not fully understand this new Omicron variant that was discovered in southern Africa in late November, nor the even newer "Omicron-similar" sub-variant that has just been discovered in Australia. Markets have calmed basically because it is believed that these infections will not disrupt global commerce. They still might disrupt your quality of life.
Interestingly, while cyclical sectors outperformed defensive types during the Tuesday session, all 11 S&P sectors closed in the green as did equity indices representative of all cap sizes. It was, however, growth or tech that led all equity types as money, probably some professional money chased their way back into higher multiple names. While the Nasdaq 100 ramped 3.03%, and The Dow Jones US Internet Index was actually a drag on performance at +2.75%, it was the pure tech plays that led the way.
As the Technology sector select SPDR ETF (XLK) ran 3.49% for the session, the Philadelphia Semiconductor Index popped a semi-ridiculous (get it?) 4.97%, led by Nvidia (NVDA) and Marvell Technology (MRVL) , up 7.96% and 7.12%, respectively. Psst... MRVL is up 28.8% over three sessions. In addition, the Dow Jones US Software Index tacked on 3.39% on Tuesday, led by a 16.42% surge in the share price of MongoDB (MDB) .
Just as a heads up, as I did just name both stocks. I did take off about 30% of my remaining long position in Marvell Technology close to Tuesday's high as I found it irresponsible not to ring the register just a little. I still love the name, and I still love the semis. Nothing personal. Just business. I will add at least those shares (maybe more) back on should I see MRVL come back in. That's how capital extraction works.
I also added a (small) after-hours short position in MDB after I noticed those shares sneak back above Tuesday's VWAP after the closing bell. There was however, a lack of liquidity in the name, at that time, which should come as no surprise, leaving the trade somewhat underdeveloped. We'll see where this name goes on Wednesday morning.
The VIX fell below 22 on Tuesday, and the CBOE Total Put/Call Ratio dropped to 0.95. That drop in either hedging risk or the seeking of protection was not all encompassing. Check this out. Fortunately, Put/Call ratios can be dissected and looked at differently.
Readers will see that the "equities only" Put/Call ratio plummeted right through all three of its moving averages from extremely elevated levels last Friday.
However, those seeking refuge... while willing to let go of protection in individual names, have not been so carefree at all when one only looks at the "index only" Put/Call ratio. Somebody somewhere is still scared.
Of course, there has been more than potential changes to monetary policy, and a changing pandemic environment to price in. Late Tuesday, the House of Representatives passed a bill (222-212) that would lead to preventing a possible default by the federal government going forward.
More importantly, it appears that a deal has been struck between Senate Majority Leader Chuck Schumer of New York and Senate Minority Leader Mitch McConnell of Kentucky that would allow the Senate to set up a procedure where the debt ceiling could be raised in such a way that would require a simple majority in the senior chamber. The only catch is that the Senate will have to vote on the process that allows the Democratic party caucus to increase the debt limit on their own if need be. That procedural vote will still require the 60 vote supermajority.
Apparently, McConnell does not see adding at least 10 Republican votes to the expected 50 on the other side of the aisle as a problem. The left needs to increase the debt ceiling in order to pass the president's "Build Back Better" agenda, and the right does not seem to care if the debt ceiling is indeed increased as long as it is done without their direct support. What was that song again?... "say what you mean, mean what you say.. one thing leads to another"... (The Fixx)
On That Note...
The Wall Street Journal reports that Senator Joe Manchin (D-WV) declined to commit to voting for the president's nearly $2T tax and spend package that focuses on climate change, social policy, and education from that newspaper's CEO Council Summit on Tuesday. Manchin reiterated his previously stated concerns over the deficit and accelerating consumer level inflation.
Meanwhile, The Washington Post reports that senior officials at the Treasury Department are internally expressing reservations over the proposed corporate minimum tax of 15% on firms with more than $1B in annual profit. This new tax idea, which was a "compromise" replacement (between Democratic party progressives and Democratic party moderates) for what would have been an outright increase to the headline level corporate tax rate of 21% (to as much as 28%). The minimum tax is projected to provide a rough $320B of new revenue over 10 years, which is a key cog in funding the president's agenda.
The problems for those concerned appear to be that not only would this tax make the current tax code less efficient, those supportive of the Build Back Better plan feel that there could be unintended consequences such as limiting clean energy investment and ultimately diminishing the effectiveness of proposed clean energy credits.
While markets appeared eager to price in less of an economic disruption caused by the Omicron variant, and have tried to ignore what the FOMC might do, say or predict in the wake of this Friday's November data for inflation, these very same markets were pricing in a reduction in the risk of federal default, and either the fact that the federal government will soon be free to once again move on expanding fiscal policy... or the fact that an increased burden on corporate performance may have more trouble passing than previously thought. Regardless of what Joe Manchin or Kyrsten Sinema have in mind. If and when they pass something, it still goes back to the House.
Glass Half Full?
Or is it half empty? Moderna's (MRNA) Stephen Hoge had already warned us that existing vaccines might be less effective against the Omicron variant of Covid-19 first found in southern Africa. (I don't think anyone knows anything yet about the Omicron offshoot discovered in Australia.) Work done at the Africa Health Research Institute in Durban, South Africa done with a very small sample size (14 blood plasma samples collected from 12 individuals) has found that Omicron resulted in an approximate 40-fold reduction in totals of neutralizing antibodies in individuals that have received two doses of the Pfizer (PFE) /BioNTech (BNTX) vaccine compared to the original strain of Covid first detected in Wuhan, China nearly two years ago.
Bloomberg News quoted Alex Sigal, head of research at the lab in Durban... "There will be more breakthrough. A good booster probably would decrease your chance of infection, especially severe infection leading to more severe disease. People who haven't had a booster should get one, and people who have been previously infected should be vaccinated." Sigal goes on to caution that these results are preliminary, and levels of immunity escape may change.
BREAKING: As I went to publication... Pfizer and BioNTech responded to say that based on one study, three doses of their vaccine does neutralize the Omicron variant. Equity index futures immediately spiked sharply higher on this response.
What Could Go Very Wrong?
One must ask themselves... Are Russia and China satisfied with making Ukraine and Taiwan uncomfortable? Do they understand the costs? Are they still assessing the costs in lives and treasure associated with taking what they want by force? Are they both assessing what might be a U.S. or allied response? What would the implications be, economically? Does one move allow a second?
In short, a lot can still go very wrong. Don't let your guard down.
Economics (All Times Eastern)
10:00 - JOLTs Job Openings (Oct): Last 10.438M.
10:30 - Oil Inventories (Weekly): Last -91K.
10:30 - Gasoline Stocks (Weekly): Last +4.029M.
13:00 - Ten Year Note Auction: $36B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)