Morale Boost, Searching for Correlation, Evergrande, CPI Watch, Trading UiPath

There is no denying that the past three trading sessions have boosted morale. Three consecutive “up” daily candles for the S&P 500, and the Nasdaq Composite, not to mention the small-to mid-cap indexes.


There is also no denying that the positive action has started to narrow. The Dow Industrials barely closed positive on Wednesday, and the Dow Transports actually did close in the red despite still strong performance across the airlines and the maritime shippers.


There’s also no way to not see that aggregate trading volume has diminished substantially as this rally has progressed, and that total trading volume for each of these “up” days individually stands decisively below the level of activity that consumed the marketplace for each and every one of those “down” sessions the market experienced just last week.


Does this mean that the rally is not real? Or some kind of elaborate head fake? No. Price discovery is always real, and this particular rally has both had some staying power, as well as some depth of character. Our two major large-cap equity indexes had by Tuesday recaptured their respective 21-day exponential moving averages (EMAs), and both can at least see all-time highs from here.


That said, one thing is clear, not all of the professional money that left domestic equities from late November into early December has been re-allocated, at least not into this same marketplace. As I have mentioned both on the air and in print, I’ll adapt to anything. Personally, I remain more comfortable trading than investing until there is at least one notably upward moving trading day on notably higher aggregate trading volume.


Breadth has not been a problem. Winners beat losers by nearly two to one at both of New York’s primary equity exchanges on Wednesday, as advancing volume comprised 65.2% of the NYSE composite, and 72.1% of the Nasdaq composite, but aggregate trading volume has certainly dried up.


I don’t have to see the whole marketplace ignite, but we have to see this correlation between momentum and volume, either for the S&P 500, or the Nasdaq Composite. I’ll even take the New York Stock Exchange or Nasdaq Composite as a proxy for either of the above. Right now, though, this group remains “Oh for four” for three consecutive days.


The professional money has been shy about re-entry. So, we wait. We wait, still seeking confirmation.

Good News-ish

Markets caught a boost on Wednesday. Prior to the opening bell, Pfizer ( PFE) and BioNTech ( BNTX) announced that in preliminary (and probably small sample) clinical studies, three doses of their Covid-19 vaccine did neutralize the recently detected Omicron variant of the SARS-CoV-2 coronavirus.


Blood samples taken from vaccinated persons one month after receiving a third (booster) shot, showed neutralization against Omicron that was comparable to the levels observed after two doses against the original strain of the virus first detected in Wuhan, China two years ago. However, two doses, left un-boosted, showed more than a 25-fold decrease in antibody levels against Omicron, which comes close to falling in line (40-fold decrease) with the results of another small study, done by the Africa Health Research Institute released about a day earlier.

Uh Oh

Fitch appears to be the first credit ratings agency to officially declare that giant Chinese real estate developer Evergrande’s overseas bonds are in default. Evergrande missed a Monday deadline to repay coupons totaling $82.5B. Evergrande has not confirmed the default. but has also apparently not responded to requests for information about these coupon payments. Evergrande is believed to have about $19B outstanding in overseas debt and more than $300B in liabilities.


This comes after Evergande publicly warned last Friday that there was “no guarantee” that the firm could meet its obligations as it initiated a restructuring process with government assistance. This also comes after the PBOC (People’s Bank of China), China’s central bank, pumped $188M of liquidity into the financial system on Monday and signaled a reduction to reserve ratio requirements effective Dec. 15.


Oh, and in other news…. Kaisa, an Evergrande competitor, also failed to repay a $400M bond that matured on Tuesday. Other than that,? Nothing to see here.

The Environment

The U.S. Treasury Department “raffled” off $36B in 10-Year paper on Wednesday. The auction was rather strong. Bid to cover landed at 2.43, up from November’s auction, but below the recent 2.52 norm. A high yield of 1.518% was awarded. Indirect Bidders, or mostly foreign accounts (central banks) took down 68.9% of the issuance, while Primary Dealers were left with just 13.4%. Really not bad at all. The Treasury will try to place $22B worth of the 30-Year variety on Thursday.


Apparently foreign demand for the long end of the sovereign U.S. curve remains robust, even as futures trading in Chicago, at last glance, are pricing in a 39% probability of a first increase in the FOMC’s target for the Fed Funds Rate in March, and a 58% likelihood that this initial lift-off occurs in May. This same market is also pricing in a 66% probability of a second rate hike in September and a 62% probability of a third rate hike in December of 2022.


The yield curve itself did steepen on Wednesday, but has flattened somewhat overnight. The all-important 3-Month/10-Year yield spread expanded from 142 basis points to 145 on Wednesday, but has contracted to 143 bps since. The nearly equally as focused upon 2-Year/ 10-Year yield spread moved from 78 basis points on Wednesday to 84 bps and back to 81 bps this morning.

Why the Uncertainty?

Well for one, the Bureau of Labor Statistics is set to release its November CPI data for consumer-level inflation on Friday morning, as the FOMC goes into session next Tuesday, and prepares to publish both an official policy statement as well as their renewed (but probably still inaccurate) forward-looking economic projections on Wednesday. Consensus among private economists for November CPI is expected to scorch the paper it prints on, at growth of 6.7% (up from 6.2%) year over year at the headline level, and 4.9% (up from 4.6%) year over year at the core.


You may have noticed the very interesting survey published by the Financial Times on Wednesday night. Apparently, the FT, in partnership with the University of Chicago Booth School of Business, polled 48 economists and asked them a series of questions that you and I might have asked.


To make it short for the purposes of this morning note, about 65% of those surveyed feel that there is at least a 50% chance that the Fed winds down its balance sheet expansion program by this coming March, while 60% of those polled also see the target for the Fed Funds Rate at least 25 basis points higher prior to the third quarter of 2022. Lastly, 40% of respondents see the U.S. labor force participation rate recovering to pre-pandemic levels by the year 2025 or later, while nearly 25% see the participation rate never fully recovering.




On that note, taking a look at numbers published over at FactSet. The S&P 500 enjoyed earnings growth of 39.6% for the third quarter and is expected to produce earnings growth of 21.1% for the current quarter, resulting in earnings growth of 44.9% for calendar year 2021. Super, dee-duper day.


Now, looking ahead, FactSet also sees Q1 earnings growth at 5.9%, Q2 earnings growth at 3.8%, and calendar-year 2022 earnings growth at 8.7%. In other words, it’s expected to get rough — and this is with a substantial level of broad unknowables in regards to monetary, and fiscal policies.


How does one price in a yield curve where one really can’t know how freely the Fed lets the short-end trade, or how invested-yield hungry foreign banks will remain for the U.S. long end? How does increased federal spending impact price discovery along said curve? Then, how does one price effective corporate tax rates going forward? Or is there an assumption made that the legislature will be unable to pass anything close to even what appears to already be on the table?

Then Again…

… The sun will shine. Birds will sing. Children will play. The pandemic could at least become part of an endemic, manageable reality. Supply lines will either shorten or un-kink. Labor will eventually seek employment that seeks them in return. At price points both sides agree upon. Other than the Russian Army massing on the Ukrainian border and a Chinese Air Force that just won’t let the Taiwanese Air Force rest, I don’t see all of the hub-bub.

Late Night Shopper

I was on a call when UiPath ( PATH) reported earnings last night. Someone on the call pointed them out. The stock came in a bit. Not a name that I really have focused on in the past, and with the New York Rangers being pasted by the Colorado Avalanche, I read the press release, I took a look at the charts, took a look at Wall Street’s forward-looking best guesses… and I made the decision to get long the name.


UiPath, by the way, is an enterprise automation software company. In short, through artificial intelligence, they make the stuff that makes robots, or at least the brains behind robots work. The company is expected to flirt with “adjusted” profitability in 2022. The stock? It has been on the highway to Hades since it showed up last spring.


For the company’s third quarter, PATH posted adjusted EPS of $0.00, beating Wall Street expectations by four cents. PATH posted a GAAP loss per share of $0.23. Revenues hit the tape at $220.82M. That was a beat and a re-acceleration of sales growth that had dropped to 40% for the second quarter. ARR (annual recurring revenue) of $818M popped 58% year over year on the addition of a new $91.9M for the quarter. Adjusted gross margin hit 85%; however, adjusted free cash flow remains negative. What did you expect? Free money?


The company guided the current quarter toward revenue of $281M to $283M, just above the $281M that Wall Street was looking for, and ARR in between $901M and $903M, for sequential growth of 10%.



Readers will note that should the stock rebound off of the lows created last week, a 38.2% Fibonacci retracement would place PATH smack-dab in the middle of that $58 to $62 unfilled gap created back in September.


Let’s zoom in.



See that “hammer” looking candlestick on Dec. 3? That can and often does signal a t least a short-term reversal. See the three white candles that follow? Those are called soldiers when they line up like that.


What we have here is an upward-facing hammer followed by three soldiers… at the bottom of the chart. Then we had what looked like an undeserved overnight selloff. I laid out a scaled series of bid and ate dinner with my family.


I don’t know if I am right, but I do think I can still spot opportunities when I see them. Wednesday’s regular session low was $45.26. The shares closed at $47.71. My average price is $44.95. I see the shares trading around $47 pre-opening.


This may just be a trade, but I kind of like what I am reading. An investment this still may be.

Economics (All Times Eastern)

08:30 – Initial Jobless Claims (Weekly): Expecting 224K, Last 222K.


08:30 – Continuing Claims (Weekly): Last 1.956M.


10:00 – Wholesale Inventories (Oct-rev): Flashed 2.2% m/m.


10:30 – Natural Gas Inventories (Weekly): Last -59B cf.


13:00 – Thirty Year Bond Auction: $22B.

The Fed (All Times Eastern)

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: ( CIEN) (0.85), ( HRL) (0.50)


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