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.

Let’s Just Pretend That Never Happened… Here I was thinking that it would be a long time before I saw a market phenomenon as strange as watching WTI futures contracts trade at negative prices last year… Granted I’ve been wrong about plenty, but seems safe to say no one was expecting to spend how much time and attention on GameStop this week. But after all the risk-off doom and gloom yesterday, apparently all it took was some time to regroup (and of course a little help from the retail brokerages restricting speculative tickers) for the market to shrug it all off again and attempt to regain the ground lost yesterday. A second look at the Fed’s re-commitment to the current path of QE as well as some reassuring eco data (jobless claims on the decline once again, Dec new home sales up for first time in 5 months, GDP broadly inline) have also chipped in, and earnings beat are finally getting the warm reception they expected (with two notable exceptions). On that note Financials are out in front with T Rowe (TROW +5.6%) leading the way post its reporting, and Semis are ripping once again with Apple suppliers getting a boost from its impressive iPhone numbers. The Software sector is also on the rise due to ServiceNow’s (NOW +7.9%) earnings, while Comcast (CMCSA +7.6%) has had to lift the Media space without much help from Facebook (FB -0.4%). The lone sectors in the red are Tech and Autos thanks to..

The pain trade – The march of historic days continues as retail trading is once again making itself herd.  Although they may be involved in a handful names, the impact is becoming broader as some institutions are forced to lower some exposure (more on that below).  The tape has had a defensive/ risk off posture since the open with all three major indexes lower, and a bid in Treasuries (10-yr yield at 1.009%) and the Dollar (DXY +50bps).  Not all sectors are red though, with Energy gaining 1%.  EIA Oil data this morning followed the API, showing a draw of 9.9mn barrels for the week.  The group has been one of the better performers so far this year, but stocks have been trending lower since last week, and many are testing technical supports (the XLE itself is held the 50 day earlier).  Also trading in the green, albeit under the surface, are the old WFH staples.  Building on moves since Monday, Clorox (+5.3%), Campbells (+5.9%), General Mills (+3%) and Walgreens (+4.1%) are higher, although only Walgreens (new CEO from the outside) has news.   Semis are leading on the downside (-3.1%) even after Maxim (-3.5%), AMD (-4%) and Texas Inst (-3.3%) all posted solid results. 

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%).

New week, same outlook – Stocks are starting the week in a cheery mood as Janet Yellen makes her case for more stimulus to the Senate Finance Committee (see below).  The earnings calendar has started with the big banks, and while their FICC businesses missed estimates, their equities units have beat.  Not surprising given where markets are, and that the new retail wave that is here (Blackberry +20%, the new target).  Q4 was about the IPO/ SPAC and any other equity issuance, and not debt capital markets (that was Q2 and Q3).  Investors are using the earnings excuse to take some profits in financials, and that sector is lagging the broader tape (BKX +63bps).  Tech, on the other hand, is leading the way getting help from  the FANG gang (+2.4%), and Semis (SMH +2.9%).  While it is Netflix (+1.7%) that reports after the close tonight, Facebook (FB +3.3%) and Google (+4.1%) are the outperformers.  Major indexes are just below their all-time highs, and both the economic and earnings calendar this week should be supportive (not as much as potentially more stimulus though).

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).