Bring on Act II… The Reddit circus appears here to stay for the time being (check out spot Silver contracts SIA +11% this morning), but clearly the initial shock of Act I has worn off and markets have regained their composure to start the new week. While we may all come away with a deeper understanding of the plumbing behind the scenes of equites clearing/settlement than we’d ever care to know (add it to the list of topics we’ve become experts in over the last year: epidemiology, Electoral College law, etc.) it seems more hopeful that Retail-mania won’t be the death blow to the current rally that many feared. With that, investors are piling back into the favorite names (GVIP +2.0%) they were forced to sell in last week’s de-grossing (chart below). That of course means the mega-cap FAAMG names are leading the charge: NYFANG +2.9% today after being dinged a healthy -4.1% last week and with AMZN (+3.4%) and GOOGL (+4.1%) on deck to report tomorrow night. FANG footprints are all over the sector leaders, with Autos (TSLA +5.2% after getting a broker u/g to a $1.13tn valuation… and no it’s not from WSB analysts) along with Software and Semis. Not much is red today, but Value / defensives are being overlooked amid the risk-on / re-grossing sentiment. That includes Energy, which isn’t getting a big boost to match the reports of big merger talks held last year between giants Exxon (XOM +0.1%) and Chevron (CVX +1.3%)… hello Chexxron?

Pull Your Head Out – It’s been a turbulent and fascinating week (Month? Year? How long is January again?) and given there’s still 2 hours left, who knows what’s still yet to come. January looked set to cruise (too soon?) to a comfortable monthly gain but that’s before the online army went nuclear. We’ll get to that but to quote an online daily, “The market needs to get a grip. GME and AMC are amusing to watch and created performance headwinds for some, but they are both meaningless distractions rather than an actual news story. On the busiest week of the Q4 season where companies are crushing expectations all anyone wants to talk about is the video game equivalent of Tower Records – people need to get their priorities in order.” About 1/3 of the way through earnings we’ve seen the standard top and bottom line beats but more encouragingly is earnings growth above 3% in aggregate and it’s not only tech doing the heavy lifting. There are a host of moving parts to juggle, with hedgies growing down exposure while others yell Buy the Dip! Earnings seemingly getting lost in the shuffle but perhaps they’re holding up a market that would be much worse off if the results weren’t as strong. And yet despite the stresses the market is feeling (a 76% jump in volatility this week), it’s largely held in there. That said, the market has broken its 50dma, a close of the futures below 3600 and 40 on VIX could portend trouble to come.

Concern Behind the Smiles… New all-time highs can usually cover up for a lot, but even with the SPX, Nasdaq, NDX, and Russell 2k all still in the running for a fresh one today, things still haven’t felt quite right of late. Of course some of that is simply investors being distracted as they watch in shock and horror (and a little jealousy) at the moves that being manufactured by the Reddit/Retail army, but more than that it seems the market is waiting for a signal to inform where to go next after entering this latest period of Rotation hesitation. Earnings season should provide more than enough tangible guidance (fundamentals have to matter some time, right?) but even with a number of companies reporting this morning, it still feels like the market is waiting to see what the “Big Guns” have to say, beginning with Microsoft (MSFT +1.6%) after the bell. That’s left most indices drifting around their flatlines in nervous anticipation, with the S&P sector table displaying a bit of a defensive tilt. That means Food Retail and Real Estate have been hovering near the top, along with more FAAMG-related Media (Is TWTR +4% because they banned the My Pillow guy?) and Software. Cap Goods are mildly negative amid an earnings tug-of-war between winners (GE +5%, MMM +3%, and RTX +4%) and the less fortunate (ROK -4%, LMT -3%, and PCAR -2%.)  Telcos are lower as Verizon (VZ -3%) reporting a cut fiber cable in Brooklyn has resulted internet outages on the East Coast (luckily all of the Redburn WFH crew still up and running). Energy is the biggest laggard despite Crude remaining fairly steady.   

Mega Move Monday…This was an actual thing in 2020. Typically, the two weekend days allowed for a significant build-up that caused some decent volatility come Monday morning. But, the energy fizzled over the course of the week and left us with Flat Fridays (we heart alliteration). Today hasn’t given us mega moves per se, but the volatility is striking. The S&P is currently flat after being down almost -1.5% and opening only slightly higher. Nothing ominous, but today does have some faint echoes of the more worrying days of last year —a few more reasons to be cautious. The race is on between the current vaccinations and the various mutations. Tech’s recent resurgence (along with the WFH ETF’s daily new highs) had already made clear that beneath all the ATHs lies concern that vaccine rollouts/ further stimulus isn’t going to spark the perfect recovery that has been priced. How to fight the latter involving possibly onerous tactics is what the market does not like. The past few weeks have seen Nasdaq actually outperforming Russell in old-school fashion (this morning NQ o/p RTY by 80bps, was as high as ~175bps earlier), with some of that “renormalization” trade backing-down and the UST curve bull-flattening early. We know it’s a busy earnings week (25% of the S&P 500 reporting — 39% by market value) and with the Fed on Wednesday there’s plenty still to play for, but for now the headlines are concerning and investors gravitating to the playbook they learned the hard way last year. Below the divergences between VVIX and VIX which should be closely observed. Last time was a year ago….

It’s a New Dawn, A New Day… – And so far markets continue feeling pretty good. Much chagrining took place over the prospect of the White House and Congress being under one party’s control but like everything else this market faces, it easily brushed it off its shoulder. Interestingly, the sector/style of stocks most viewed at risk were tech/growth/momentum but over the last two days they’re having a go. At the COB yesterday afternoon, the SPX, DJIA, CCMP, RTY, NYFANG+; you name it, it likely closed at a new high. Of course some are bit more concerning than others. What does the WFH ETF hitting a new high say about all that “vaccine hope” baked into the outlook for economic recovery? FAAMNG roaring back to life may feel good for indices, but remember big Tech was the safety play last year. And if you look at the chart below, it’s not just the FANG GANG lifting the Nasdaq (and large parts of the S&P) boat. Alternately, the reflation/reopening trade has stumbled, lagging growth by a huge margin yesterday and doing little to close that gap today.

It’s a New Dawn, A New Day… – And so far markets continue feeling pretty good. Much chagrining took place over the prospect of the White House and Congress being under one party’s control but like everything else this market faces, it easily brushed it off its shoulder.

Don Voyage… Man those 4 years breezed by, didn’t they? It’s obviously a special day in America (despite the pomp and circumstance being socially-distanced and watched over by the National Guard) and US equities are doing what they do best lately in rising to meet the occasion. After all, a rally that’s feasted so heavily on ”hope” should have no trouble cheering on what is essentially a ceremonial exercise. That said inauguration days for 1st term presidents are historically down days for the Dow, which is poised at the moment for its best Inauguration Day performance in the last 100 years (after a cool +73% gain since Trump’s swearing in…). The Nasdaq is still the bigger story/outperformer today, with the good ole FANG Gang powering higher despite all the stimulus fervor whipped up by Yellen’s testimony yesterday. Netflix (NFLX +16%) reminding everyone last night why “Growth” is labeled as such is a big reason for that; more on that below, but Media, Tech, Software, and Retail perched atop the sector table shows the sway the big boys have today. The BKX (-2.1%) finds itself still unable to break out of its earnings season stall out, as more disappointing results from non-IB banks (BK -7.6%, USB -5.5%, CFG -2.7%) have overshadowed an impressive trading-driven beat from Morgan Stanley (MS -0.1%). Household Goods are also lagging despite P&G (-1.2%) boosting its FY guidance after a solid Q2 and Colgate-Palmolive getting a broker upgrade (CL -1.1%).

Second-Guessing Into the Weekend… US market action today suggests investors are thinking they may have gotten a liiitttle ahead of themselves in declaring the reign of the Reflation trade. Granted the damage done is limited in comparison to the recent gains, but rotation is firmly in reverse today as investors grapple with a few doses of reality that blur the rose-colored recovery timeline that has been coaxing markets higher. The consternation began with the long-awaited announcement last night of President-elect Biden’s “American Rescue Plan”, which includes additional $1400 individual checks and a proposal for a $15 minimum wage within its $1.9tn price tag. The details themselves came as no surprise, yet futures were lower overnight as months of stimulus “hope” were replaced by the reality of likely Republican resistance as Biden seeks to garner bipartisan approval (not to mention the reality of corporate tax hikes). Eco data and Bank earnings (more on these below), piled on as nagging reminders as to why the stimulus is necessary in the first place. The uneasiness has left defensives Real Estate and Utilities atop the sector table, while the Cyclical gang of Energy (XOM -4.3% on word of an SEC probe), Banks, and Transports fill out the bottom (but notably maintain healthy weekly gains).

Calm on the Surface… Granted things are looking a bit more exciting this afternoon as equities are finding their footing, but this morning’s choppy trading around the unchanged mark might’ve suggested there’s not much going on for the market to digest. An ongoing (second) impeachment vote, several Fed speakers making comments, President-elect Biden scheduled to reveal details of his stimulus plan tomorrow: these are things investors have grown accustomed to coping with coolly. Still the S&P intraday chart masks the underlying churn, as markets are seeing a bit of a reversal of the reflation/rotation trade that’s been in focus recently. Tech has wrestled back a spot at the top of the sector charts (NYFANG +1.2%) along with more defensives Utilities / Real Estate, while Intel (INTC +7.6%) is chipping in to help Semis after replacing its CEO with VMWare (VMW -7.2%) CEO Pat Gelsinger. Target (TGT -0.9%) also a splash this morning announcing a holiday sales blowout, but with expectations already so high the news received little reward (though XRT +0.2% is pushing for yet another ATH). On the flipside it’s the value/cyclical sectors that have popped recently that are lagging today: Banks, Materials, Autos bring up the rear.

Turnaround Tues… – Well perhaps not quite. It seemed like we were set for the typical BTP-bounce back this morning but the broader market hasn’t played out that way. Cyclicals have held firmly onto the torch today after various members of the FANG world (Amazon, Netflix and Facebook to name a few) hit 3m relative lows yesterday. The 10-year yield hitting its highest in 10 months (target still 1.5%) has spurred banks, themselves appearing on 3m relative high lists, just in time for investors to decide if this is much ado about nothing (earnings Friday). Crude also made 10m highs yesterday and that trend carries on today, the sector capitalizing on the underlying commodity’s strength. But it’s autos that are miles ahead of the pack, and it’s just because Elon tweeted something clever! Instead, Aptiv is ripping after their performance at CES yesterday as it attempts to be the main brain behind autonomous driving. With the move higher in yields however, telcos and utilities are lagging significantly. Could a change in market leadership finally be coming? A stimulus package in the offing (details expected this Thursday), higher rates and stretched valuations from the growth/Mo crowd suggest it just might be.