Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I'll pick a couple of themes to explore with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether its bearish, bullish, or something else!
The purpose of this note is to add some extra context and color. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.
So here's another S&P 500 #ChartStorm write-up!
1. A new All Time High for the Market: How could the first chart this week be anything other than a snapshot of the S&P500 making its first new all time high since September last year? Not really much else to add with this one, other than the point that the total return (dividends) index had made its new high earlier (duh) and that the index closed at the new ATH on Tuesday and then also closed the week on another new ATH. Not a sign of weakness.
Bottom line: The S&P500 made its first new all time high since September last year.
2. Small Cap Stocks lagging the S&P500: But while the S&P500 is making new highs, its small-caps counter-part, the Russell 2000 is lagging far behind. I think this reflects a few things, namely folk have gone down the path of least risk in the rebound with large cap quality, shunning the sometimes riskier and lower quality small names.
But whatever narrative you want to run with on that aspect, I think the more interesting question is not "why", but what happens next? Whenever you see a gap or divergence in markets you should pay closer attention, because some very interesting opportunities and signals can come. I know I will be spending some time looking closer at small caps this week!
Bottom line: Small cap stocks have *not* made a new all time high, and are lagging behind.
3. Market Breadth - Green Light: This next chart comes from Mark Ungewitter and shows how cyclical bull markets are normally signaled by breadth recoveries greater than 50% following breadth "wipeouts" (i.e. falling to less than 20%) - just like what we are living through right now.
Like just about all signals and indicators, it is not completely infallible, but I would say it has worked enough times in the past that it merits due attention.
Bottom line: The breadth recovery seems to be signalling a new cyclical bull market.
4. Sentiment Recovery Lagging: This next chart stands out to me because while sentiment has certainly rebounded with price, it has lagged behind. As we saw earlier the market has gone on to new highs, but charts like this show (to me) a lingering sense of skepticism. I talked about this in my weekly report, where I took a broader look at sentiment, it's a uniquely mixed picture.
Some tactical indicators say risk of a pullback is high, yet other indicators show large investors quite lightly positioned. It's one of those situations where there's a little something for everyone: the bulls will say the skepticism is a source of future capitulative buying power, and the bears will say people are right to be skeptical!
Bottom line: Sentiment has rebounded, but has lagged behind the recovery in price.
5. SPY (S&P500 ETF) Short Interest: This next graph from hedgopia shows short interest in S&P500 ETF (SPY), it fell further through April and is now close to the lows of Dec 2017 after squeezing down substantially from the highs back round the turn of the year. Hard to short a market that has been this strong... Last point to make, from a sentiment standpoint this is starting to look contrarian bearish (not much more shorts to get squeezed into buying power, and a lack of shorts signalling increased optimism). Short interest doesn't always work as a contrarian signal, but it is another piece of info to take note of alongside the broader sentiment/positioning picture.
Bottom line: Short interest has dropped back towards late 2017 levels.
6. Thomson Reuters Most Shorted Stocks: Speaking of shorting, the next chart shows the Thomson Reuters Most Shorted Stocks index (i.e. a map of performance of the most shorted stocks). Interestingly this index has lagged behind the S&P500... which means basically traders were right to short those stocks.
One thing I would note is that the path of this index looks very similar to that of small caps (see chart no. 2), so on that respect, I guess we know how traders are positioned there. Which again, makes small caps seem all the more interesting.
Bottom line: The most shorted stocks have lagged behind the S&P500.
7. S&P500 vs Treasury-Bund Spread: This chart shows the S&P500 against the spread between the US 10-year government bond yield and the bund (German govt bonds). It may well be a spurious correlation, and is probably doomed to break down at some point. But the thinking with this one is that if you think the treasury-bund spread is close to topping out (frankly I could argue either way, but valuations favor a peak), then arguably you also get bearish on US equities. It definitely reflects some key macro variables (relative growth, monetary policy), but it borders on "fun with charts".
Bottom line: The S&P500 seems to have traded closely in line with the bund-treasury spread.
8. Gold Mining Stocks vs the S&P500: This is another somewhat suspect chart in that there's maybe an attempt at finding a correlation or gap that doesn't exist, but it does highlight a couple of really important/interesting points in my view. First is the truth that gold stocks have lagged well behind vs the S&P500. This should be no surprise, as gold remains in a bear market.
While the apparent gap in the chart may not ever close, there certainly will come a time again where gold stocks outperform the market, and perhaps in a substantial and sustained fashion. For this to happen, gold will need to pass a few key tests (break through resistance, down trend channel, etc) to confirm a new bull market, and until then, with tech companies driving the broader market higher, it's going to be tough for gold stocks to outperform.
Bottom line: Gold stocks have been lagging behind the S&P500 as gold remains in a bear market.
9. S&P500 vs the ISM Manufacturing PMI: This is another one of those charts where if you add more history the apparent relationship will vanish, but it is well known that the S&P500 and PMI are related (especially if you look at the S&P on a YoY basis). The point though that's presented in this chart (still valid I think) is that the market recovery in 2016 was featured by a recovery in the PMI too, and as yet we haven't seen a recovery in the PMI.
However, it should be noted that the PMI did not fall below the key 50 point mark this time (so it's still indicating expansion), and it has clearly started to stabilize. So even if it does tick-up from here it would be more re-acceleration than recovery per se. The other thing is, we know that price often moves faster than fundamentals - something to keep in mind for the next chart...
Bottom line: Though stocks have rebounded, the PMI is yet to rebound.
10. US Cyclicals vs Defensives and the PMI: This next chart is one of my own, and it needs a little bit of explanation (although the takeaways should be obvious). It shows US cyclicals vs defensives, but I have de-trended that series as it has a clear upward trend through time, and hence de-trending it provides a better fit with a stationary series like the PMI.
Anyway, the key point is that the last few weeks have seen US cyclicals vs defensives basically pricing in a substantial rebound in the ISM manufacturing PMI. I would say that if this did come to pass (certainly not guaranteed, and it looks like the consensus is actually for the ISM to print at 55.0 in April vs 55.3 in March), then it would probably shakeout some of that lingering skepticism I talked about earlier.
Briefly though, it is worth noting (again) that few indicators are infallible, and we can see a few times where the market got over optimistic or over pessimistic aka wrong. So while I wouldn't hang my hat on this, I would say it will probably come as a surprise to many people.
Bottom line: Cyclicals vs defensives are pricing in a PMI pop.
Summary
With the market making a new all time high, and yet small caps lagging behind there's something for bulls and bears. With sentiment looking stretched on some measures and skeptical on others, there's again something for bulls and bears. With price outpacing the PMI there's again something for bulls and bears. And with various other bullish vs bearish signals, there's basically something for everyone in the current market environment. I think the weight of evidence (both here with these 10 charts and elsewhere) makes for a bullish medium term outlook, with plenty of scope for selloffs/pullbacks. So flexibility in thinking and positioning is probably going to pay.
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