Weekly S&P 500 ChartStorm - 10 Sep 2016

Those that follow my personal account on Twitter and StockTwits 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 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!

The purpose of this note is to add some extra context beyond the 140 characters of Twitter. 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 the second S&P 500 #ChartStorm write-up

1. This year's market vs the historical average: This chart surprised me when I put it together. I decided to use 2 axes because the average (black line) by virtue of being an average moves in a relatively narrow range vs the swings and gyrations of each year. The pattern is clear and YTD 2016 appears to be tracking very closely to its historical seasonal pattern. This means we're probably going to have to go through a rough patch before that nice looking year-end rally comes into play.

Bottom line: 2016 is playing out remarkably similar to the historical seasonal pattern, this is bad news short-term.

2. An average year in the life of the S&P500: The below graph shows the average seasonal pattern across the year (by business day, from 1990-2015) for the S&P500 and the CBOE option implied volatility index or VIX. This is a chart that's worth keeping on hand as a reference guide to seasonality for equities and equity risk across the year. The key takeaway as above is that we're heading into the rough part of the year right now, so it warrants a cautious bias.

Bottom line: The seasonal pattern for equity risk and equities is for more volatility and weakness at this time of the year.

3. Seasonality by the month: This chart shows the seasonal pattern by month and also includes the "% positive returns" (i.e. in September the historical record is that only 45% time are returns positive). It's worth noting the % positive because averages can and do deceive - there are always exceptions to the rule when it comes to seasonality in the stockmarket, and if you think about the 45% stat - look at the inverse, i.e. the market only fell 55% of the time - it's not far from 50/50. So while seasonality is worth factoring in, and can help form a more balanced and broader view, it's not the be all and end all.

Bottom line: September is the worst month historically, but historically September saw negative returns only 55% of the time.

4. VIX seasonality: It should be reasonably unsurprising to learn that the VIX displays a similar pattern of seasonality to the S&P500. What may be surprising or concerning is that 2016 has tracked the historical trend quite closely (with the exception of the January panic and Brexit vote). The reason it would be concerning is that usually the VIX trends up around this time of the year, and Friday's spike may be just the beginning of a more volatile patch. So definitely something worth noting for VIX traders.

Bottom line: The VIX also displays seasonality, and it tends to go higher this time of the year.

5. VIX options volume: Schaeffers research highlights the merits of monitoring volume in options trading on the VIX and how it often functions well as a market timing tool. The rule of thumb is that it spikes in a sell-off, and when it hits low levels that's usually the time to get cautious. Friday's trading makes you think when you look at this chart.

Bottom line: VIX options volume is a useful timing tool, it recently signaled a bearish/cautious outlook.