Typically, the Technology and Communication Services sectors tend to have high levels of correlation. However, beginning in mid-October, that relationship started to change course. While there have been other performance divergences between the two sectors this year, the current disparity is particularly noteworthy. Since mid-October, the Technology Select Sector SPDR Fund (XLK) and the Communications Services Select Sector SPDR (XLC) have been moving in opposite directions causing the YTD performance spread between the two sectors to widen out to the most extreme level of the year with Technology outperforming by 15.9 percentage points.

Since the start of 2019, just after Standard and Poors switched major stocks like Facebook (FB) and Alphabet (GOOGL) out of the Technology sector and into Communication Services the two ETFs tracking these sectors have had a median 50-day rolling correlation coefficient of +0.89, which implies a strong relationship between the two. For the years 2019 and 2020, the minimum correlation coefficient was +0.68, which still signifies a strong relationship.  In 2021, though, the relationship has reversed and actually inverted this month, meaning that over the last 50 days, the two sectors are moving in opposite directions.Click here to view Bespoke’s premium membership options.

Since Friday’s close, US natural gas future prices have declined 16.4% as of 11:00 AM on Tuesday, but there have been price discrepancies across the globe. We discussed these differences between natural gas prices in the US versus Europe in today’s Morning Lineup. In the US, natural gas prices have not seen a two-day decline in excess of 15% since 12/31/18 and going back to 2000, two-day pullbacks of this magnitude have only occurred 12 other times, four of which occurred within a month and a half time period (12/13/2000 – 1/30/2001). Heading into the current decline, the speculator net position was in a normal range, so dramatically offsides positioning from futures traders is likely not the driving factor behind this move. For more information on that positioning data, check out Monday’s Closer.

Looking ahead, forward returns of natural gas after a two-day pullback of more than 15% (without another occurrence in the prior three months) tend to be negative (which can be seen as a positive for consumers as it translates to lower energy costs).  The day after the six prior periods shown, the average next-day performance for natural gas was a decline of 0.7% (median: -2.9%).  Over the next week, the average decline was just 0.4% but the median decline was much greater at 6.1%.  Looking out over the next one and three months, performance continued to weaken with average declines of 8.8% (median: 9.2%) and 4.9% (median: -8.7%), respectively.  Downside momentum in natural gas was also pretty consistent across as natural gas was only positive across all the time windows shown one-third of the time. Click here to view Bespoke’s premium membership options.

November regional Fed manufacturing surveys have been pretty mixed but generally have shown activity decelerating.  The fifth and final report out of the Dallas Fed released this morning reiterated that slowdown in manufacturing activity. The Dallas Fed’s headline reading was expected to show a modest increase from 14.6 to 15.0. Instead, as with other regional Fed surveys, activity decelerated with Business Activity falling to 11.8.  While current conditions did not improve as rapidly as expected, expectations were relatively optimistic and have risen sharply over the past two months recovering most of the decline since June’s high.

While General Business Activity was lower, under the hood the report was pretty good with more categories moving higher than lower. Additionally, the bulk of these categories remain at historically strong levels.  In fact, Company Outlook is the only one in the lower half of its historical range. General Business Activity and Captial Expenditures are the only others that are not in the upper quartile of readings.

Demand has continued to rebound with New Orders rising from 14.9 in October to 19.6 this month.  Given the higher Order Growth Rate, Unfilled Orders also continue to rise at a historically elevated rate, though, that reading did fall in November as Shipments have picked up.

That increase in Shipments also likely had to do with alleviation for supply chains as the index for Delivery Times fell by 4.2 points.  Other regional Fed surveys echoed those results this month with declines in Delivery Times of their own. That being said, the index remains historically elevated, and the commentary of the report points to a slew of supply chain-related issues holding back business. Given Delivery Times were not as long and production has risen, Inventories rose back into positive territory.

While there is evidence of improving supply chains, prices for raw materials are still rising.  The index for Prices Paid has resumed its move higher and set the first record high since June.  Conversely, Prices Received experienced a sharp reversal lower from a record high set last month.

The price of labor is also continuing to rise. The index for Wages and Benefits came in only a half-point below the June record high. Even though current conditions narrowly missed a new high, expectations did set a new record.  Not only did firms report that they expect to pay more for labor, but the same goes for Capital Expenditures. That category’s expectations index hit the highest level since March 2019 in November even while the current conditions index came in at the lowest level since the end of 2020. Pivoting back to labor, the index for Employment and Hours Worked were both moderately higher in November. Expectations for these two categories also rebounded after steep drops in October. Click here to view Bespoke’s premium membership options.

Crude oil prices are back on the rise this week after a sharp decline last Friday.  As for how severe of a drop it was, front-month WTI futures fell 13.06% which was the worst single-day decline since April of last year; the same month that saw crude prices dive into negative territory. Looking back to 1983, including last Friday, there have only been 32 days in which crude has fallen double-digit percentage points in a single session.  Outside of the series of volatile moves in March and April 2020, November 28, 2014 was the last time that there was as sharp of a decline of at least 10 percentage points.

Crude prices are rebounding today and are currently back above $70, although they’ve been pulling back all morning.  In the table below, we show the other dozen times prior to Friday in which crude oil fell at least 10% in one day without having done so in the prior 3 months.  As shown, today’s rebound is actually pretty abnormal with WTI typically declining the day after a 10% drop.

As for longer-term forward performance, crude has continued to average declines out over the next three months with positive returns only half the time.  On the other hand, six months to one year out has tended to see stronger than normal returns for the commodity.  Click here to view Bespoke’s premium membership options.