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Weekly S&P500 #ChartStorm - 4 Sep 2016

Those that follow my personal account on Twitter and StockTwits will be familiar with my weekly S&P500 #ChartStorm in which I pick out 10 charts on the S&P500 to tweet. Typically I'll pick a couple of themes and hammer them home 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!

Since I've started writing this blog I will post all the charts in a single article with a couple of extra comments around why I selected the charts; a bit of extra context, and where possible try to bring it all together. Of course it's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts worth paying attention to.

So here we go with the inaugural $SPX #ChartStorm write-up!

1. From low vol to no vol - I quipped on this one that "markets don't go up in a straight line, but they sometimes go sideways in a straight line!" Since July the S&P 500 has traded in a very tight range with vol measures such as VIX, BB width and ATR squeezing.

2. VIX curve indicator (VIX to VXV ratio) sometimes a good indicator for overbought/complacent vs oversold conditions. This chart is notable because the indicator moved towards relatively oversold levels in the past week - it raises the question as to whether we just saw a micro-correction that's needed before another leg higher...

3. Adding weight to the micro-correction theory is the sharp breakdown in market breadth that has seen 50dma breadth (% of SPX companies trading above their 50 day moving average) fall to its lowest point since the shock Brexit vote outcome. At 48.41% it's looking mildly oversold.

4. Further adding to the micro-correction thesis is the drop in the CNN Money Fear and Greed Index - back towards the bottom end of the recent range. It's far from fear levels but it does show a mild shakeout has occurred.

5. Another from one of my favorite websites; Index Indicators - the put/call ratio moved into mild panic mode; consistent with the type of behavior usually seen in a selloff or correction.

6. Back on the topic of no vol, the below chart from Ned Davis Research technical strategist Will Geisdorf observes that the last time the monthly range of the S&P500 was this low was in 1968. More of a mildly interesting chart - but one takeaway would be that the market continued to rally through those low vol periods...

7. On the topic of volatility one chart that has been making the rounds is the record short speculative futures positioning in the VIX. The chart below from Hedgopia illustrates this. Most people would rightly observe that shorting VIX is risky and akin to the "nickels in front of a steamroller" type trade, but take note of the next chart...

8. The reason people short the VIX of course is for profits. Assuming no change in the VIX (a big and sometimes dangerous assumption) short-sellers of VIX futures will earn positive roll returns when the VIX futures curve is in contango - this is explained by FactSet in the blurb below.

9. Moving on to a different topic, more on the fundamentals, the chart below of S&P500 earnings from Yardeni shows a clear turning of the corner from contraction to mild year-on-year growth - thus I note we could be leaving the mild earnings recession that was induced by the commodity crash and the strangling effect of the surge in the US dollar. So I say about the earnings recession; "don't cry because it happened, smile because it's over"...

10. More on the earnings picture, the below chart from FactSet shows an optimistic outlook on earnings through 2017. The previous headwinds to earnings of the commodity crash, US dollar surge, and recession in emerging markets appears to have faded for now - see the global PMI wrap for comments around the emerging markets recovery. Clearly if corporates can deliver on these earnings expectations that would be the kind of thing that would help the market head higher.

So where does all this leave us?

There's probably 3 main themes:

1. The low vol or no vol environment

2. The micro-correction thesis

3. A passing of the earnings recession

The latter 2 points should be net bullish for the outlook - if we did have a micro-correction it could be the kind of thing needed to shakeout sentiment and set up for another leg higher; possibly supported by a mildly improving earnings outlook. The no vol theme is ambiguous - a period of low volatility may be necessary to encourage investors back to the market after the tumultuous start to the year, but at the same time the old adage that low volatility is a good predictor of future higher volatility is hard to ignore.

I would be interested any alternative interpretations - I've added a comments box below.

Best regards,

Callum Thomas

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