S&P 500 Futures

Languishing for Longer

Cabin fever grows as we anticipate a return to normalcy but recent efforts to distribute a vaccine show we are in for a long winter. The stock markets have performed well recently as we slog through the next wave of the coronavirus so let’s start by taking a look at how we are trading in the stock market.

The chart below is of the S&P 500 futures since Thanksgiving and you can see there is a nice trend channel that has developed. However, at the bottom of the chart, a negative divergence in the Relative Strength Index (RSI) occured on the January 8th high. This means that weak hands pushed the index to that last high and now the price action on Friday indicates something larger to the downside may be in play.

A Chart of the S&P 500 Futures by Kisco Capital.

So far, not a big pullback but we did close below the trend channel and sentiment readings have been quite high these last few weeks – high optimism can be a sign of a reversal. In all likelihood, the S&P 500 will continue lower next week and a move down to the 38.2% Fibonacci retracement at 3593 would not be a shocker – a 6% pullback from the previous high.

Bond prices have also been falling as yields rise which indicates either a recovering economy or higher inflation (or both). However, if the rate of change is too fast then stocks will take this as bad news and trade poorly. The chart below shows that 30-year Treasury yields have risen steadily since the August low of 1.18%. Resistance was met this week at 1.9% but if momentum pushes yields through 2% then higher than expected inflation may be creeping into the system. In this case, the Fed would need to raise interest rates sooner than expected which they have promised not to do for the “foreseeable future”. But then again, they are making this up as they go along.

A chart of the 30 year Treasury bond yield by Kisco Capital.

One final thing, earnings season will ramp up next week so we will see which parts of the economy are strong and those that will languish for longer.

Chart of the Week!

According to Bloomberg, there were 244 large companies with liabilities above $50 million that applied for reorganization or a complete liquidation form of bankruptcy. Many of the large ones happened earlier in the pandemic, with energy companies like Chesapeake Energy, California Resources and Ultra Petroleum all filing for bankruptcy with a combined $24 billion in debt. Another industry, consumer retail, saw longstanding companies fall from COVID-19 closures; among the most recognizable being Neiman Marcus and J.C. Penney. (Statista)

Statistic Chart of bankruptcies.

Economic & Central Banking Snippets 

  • The number of workers filing for jobless benefits posted its biggest weekly gain since the pandemic hit last March. Unemployment claims rose by 181,000 to 965,000 last week, reflecting rising layoffs amid a winter surge in coronavirus cases. The U.S. labor-market recovery stalled last month with the December jobs report showing the U.S. lost 140,000 payroll positions. The broader slowdown has included weakness in household spending, though economists expect the economy to rebound later this year as a Covid-19 vaccine is distributed through the population. But the increase in unemployment claims is another sign that the economic recovery is, at least for now, sputtering, as Covid-19 infections hit record levels nationwide. (WSJ)
Initial Unemployment Claims
  • Headline CPI in December rose .4% m/o/m and the headline rate is now up 1.4% y/o/y. Services prices moderated further while goods prices accelerated further. (Boock Report).
  • Industrial production in December surprised to the upside with a 1.6% m/o/m increase, well above the estimate of up 0.5%. A lot of this was the jump in utility output as the weather turned cold. Manufacturing output was stronger (+0.9% m/o/m) and capacity utilization rose to 74.5% from 73.4%. (Boock Report).

Macro Snippets

  • Negative-yielding debt topped $14 trillion in July, having doubled since December, and now makes up more than 25% of global investment-grade debt. All of Germany’s government bonds are now under water; investors effectively pay the German government 0.5% for the privilege of buying its benchmark bonds. The U.S. is one of the few outliers, with none of its $16 trillion government debt pile yielding less than zero, but across the world, strategists are warning that the problem may get worse. (280 Capital Markets)
  • Visitors from Toronto to New York to Buenos Aires have long flocked to Florida for sun, surf and shopping. Now they are coming for the Covid-19 vaccine. Some of the arrivals are Americans or foreigners who own second homes in the state and reside here part-time. Others are making short-term visits, seizing the opportunity provided by Florida’s decision to make the vaccine available to people age 65 and older, including nonresidents. The practice, which some are calling vaccine tourism, has drawn fire from some officials and residents, Arian Campo-Flores and José de Córdoba report. (WSJ)
Florida vaccinations.
  • President-elect Joe Biden is calling for a $1.9 trillion Covid-19 relief plan to help Americans weather the economic shock of the pandemic and pump more money into testing and vaccine distribution. (WSJ)
  • Global semiconductor shortages are forcing car companies, like Volkswagen, Ford, Fiat Chrysler, Toyota and Nissan, to halt or slow production, reported AP. The increase in consumer tech gadget use during the pandemic and more electronic features in new cars are said to be the causes of the shortage.
  • Target reported that comparable sales rose 17.2% in November and December, as customers shopped both online and in stores, spending more money per purchase than they did last holiday season. Combined transactions in Target stores and on its website rose 4.3% and average tickets grew by 12.3% year-over-year, the company said. (Investopedia)
  • U.S. municipal bond issuance in 2020 was the highest in a decade, reflecting the collapse of interest rates and the increased costs cities and state governments are facing from Covid-19 shutdowns. The muni issuance boom is unlikely to abate as cash-strapped local governments struggle to make up for ongoing Covid-19-related shortfalls and pay back old debts. (WSJ)
Muni borrowings.

That is all for now and thank you for being a subscriber!

Paul J. McCarthy III


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.