Weekly S&P 500 ChartStorm - 18 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 another S&P 500 #ChartStorm write-up

1. 50-day moving average breadth: This chart tracks % of S&P500 companies trading above their 50 day moving average and serves as a decent overbought/oversold oscillator. While we always look for breadth divergences, we also look for extremes in breath to provide a guide for extremes in price/sentiment. The latest readings show the indicator clearly in the oversold zone - as bad as it got during Brexit, but not quite as bad as the August/January corrections. So this is one piece of evidence for the oversold case.

Bottom line: 50 day moving average breadth is pointing to oversold conditions for the S&P500.

2. VIX futures cuve: This chart shows an indicator based on the VIX futures curve (ratio of VXV i.e. medium term VIX vs VIX i.e. spot VIX). The indicator typically drops during a correction or selloff as spot VIX spikes tend to be more extreme than the rest of the curve. While the indicator rebounded on Friday (a good sign), it hit over sold levels at the worst point, so this is a second piece for the oversold case.

Bottom line: The VIX futures curve indicator went oversold.

3. The CNN Money Fear & Greed Index: This indicator crunches together 7 different components to give a reflection of the mood of the market (Greed vs Fear). In the case of this sentiment metric it went slightly worse than during Brexit, but is still comfortably above the Aug/Jan correction levels. This is an important point because in an uptrending market sentiment indicators don't need to fall as much to provide a contrarian buy signal. So arguably this is a third piece for the oversold case.

Bottom line: The Fear & Greed index flipped over to fear mode, which is an important signal for contrarians.

4. IPO activity vs the market: This chart shows the monthly number of IPOs vs the S&P500 over the past 55 years and seems to display a clear pattern that whenever IPO activity slows down the market is usually either undergoing a correction or bear market or is actually at a bottom. This is an important observation because recently the trend has been for a slump in IPO activity - the type of pattern of activity that you would see around a market bottom. So on this chart alone you would say that the twin corrections of August and January was the worst of it and a major market bottom is in.

Bottom line: There has been a slump in IPO activity, which is usually consistent with a major market bottom.

5. Forward and trailing PE ratios: This graph tracks 2 PE ratios (trailing 12 month and forward earnings) and shows that PE ratios are generally higher than usual, in fact you have to go back to the dot com mania to find similar levels of valuation. The optimist would say that they're only around levels that preceded the last part of the bubble (i.e. around 1997/98) while the pessimist would say that they're too expensive and point to poor future returns.

Bottom line: PE ratios are elevated vs history, and the last time they were this high was around the later stages of the dot com market mania.

6. Price to sales ratio: A similar but different valuation metric, the price to sales ratio shows a market that is looking much much more overvalued than the PE ratio would suggest. One reason it's so high is the structurally higher level of profit margins (i.e. you would expect a higher price to sales ratio if profit margins were higher), so this chart says more about the change in composition of the market and a shift towards services and software vs manufacturing and hardware. Having said all that, it is still quite a high number, and warrants noting.

Bottom line: The price to sales ratio for the S&P500 is at a historical extreme high.

7. S&P500 PE ratio vs 1 year forward returns: This chart attempts to determine whether there is a relationship between high PE ratios and short-term performance (1 year forward returns). As you can see there is little to no relationship, so we can conclude that in the short term valuations provide no real useful information...

Bottom line: There is little to no relationship between PE ratios and short-term returns.

8. S&P 500 PE ratio vs medium/longer term returns: Where it changes, as this graph shows, is for medium-longer term holding period returns. PE ratios actually historically provided a good guide for future medium to longer term returns. So while PE ratios have no useful information for the short-term, over the longer term they provide a decent guide to returns. The pattern is higher PE ratios tend to point to lower or negative longer term returns, and lower PE ratios point to higher longer term returns.

Bottom line: PE ratios historically provided a good guide on medium to longer term returns.

9. Small businesses citing political climate as a reason not to expand: This chart is basically a measure of small business perceptions of political risk, and reflects the degree to which it's impacting on their decision making. With such a polarizing and divisive presidential campaign it's understandable that there is a certain air of angst out there. It is clearly impacting negatively on confidence and will likely also put a dampener on real activity. So it's worth pondering whether the selloff that we just saw was a result of political risk. If it is the case, then it's probably fair to expect more political risk driven volatility episodes as November 8 approaches.

Bottom line: