Weekly S&P 500 ChartStorm - 2 Oct 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. 50dma breadth: First one is market breadth (% members above 50 day moving average), but also a minor chart pattern (a symmetrical triangle). I highlight this chart because it illustrates how the market seems poised for a move (either way), and those lines will be crucial in setting the direction for the next move. Market breadth has made a series of higher lows, suggesting underlying strength, but given a symmetrical triangle can break either way it will likely pay to watch for a break (either way) and go with it).

Bottom line: The market is coiled and ready for a move either way.

2. Twitter sentiment: This chart shows an innovative way of looking at market sentiment - by running an algorithm to analyse tweets. What's interesting about this chart is that the twitter sentiment momentum line for SPY has broken its downtrend, again suggesting underlying bullishness.

Bottom line: Twitter sentiment is bullish on the S&P500

3. Active manager positioning: This chart shows the NAAIM exposure index against the S&P500 - there's two things to note, first of all the indicator is best used in market timing for picking bottoms... i.e. when it gets "too bearish", vs tops. When the indicator gets "too bullish" it often occurs when there is a strong trend and underlying momentum in the market, and thus using it top pick a top can easily wrong foot you in the short term. That said there has been times when it works to pick a top, and these are usually when it lines up with other indicators for confirmation, something to keep in mind...

Bottom line: The NAAIM index is quite bullish at the moment.

4. CAPE: This chart comes from an article that discusses whether there is some sort of QE premium. The basic conclusion is that valuations have been pushed to extreme highs, and out of line with fundamentals by central bank policy. Either way, the CAPE (Cyclically Adjusted PE - or price to 10 year average earnings) is fairly high vs history and historically correlates to lower longer term expected returns, but then again central bank policy and ultra low yields are a form of fundamental that could be used to justify these levels...

Bottom line: Valuations, specifically the CAPE, are high - arguably as a result of central bank policy.

5. Another view of valuations: This one from Leuthold shows price to 5 year (as opposed to 10 year) normalized earnings, and comes to a similar conclusion - valuations are high. It's worth noting that valuations have gone to higher levels in the past - which is not necessarily a justification or rationale to chase it, but it's cautionary that valuation arguments for the topside can take a while to play out.

Bottom line: Another view of valuations (price to 5 year normalized EPS) also shows high/expensive valuations.

6. Tobin's Q: This chart appeared in an article taking a different position on the impact of central bank jawboning and extraordinary monetary policy aka QE. The main conclusion is that the Fed does influence the markets, just like it has done for decades, and now really isn't that different (valuations are high but not materially stretched from 2006-07 when the Fed was actually hiking).

Bottom line: Valuations are high and central banks influence the markets, but perhaps not more than usual.

7. S&P500 fundamentals: This chart from a BCA blog post highlights how fundamentals are not wildly supportive for equities in the longer term (S&P500 market cap % of GDP seems to have reached the upper end of the range, corporate profits % of GDP have rolled over, and earnings have contracted). However they conclude that a gradualist Fed, the pause in the US dollar bull market, and no imminent recession mean US stocks could be supported in the short-medium run.

Bottom line: The fundamentals don't look too hot for the S&P500 longer term, but short term the market could still go higher.

8. Seasonality: Time to talk about seasonality again, the reason is, while we're still not quite out of the woods on negative seasonality... we're getting closer to the part of the year that sees positive seasonality for the S&P500. The old saying , "sell in May", in its long form actually says *come back* in late October/November - a nod to the fact that historically the average pattern has been poor performance May-Oct and good performance Nov-Apr. So if you can get through the next week or so things might start looking up - but keep in mind the caveat - seasonality is just one factor and there are always exceptions, and those exceptions can come at the worst possible time.

Bottom line: We are getting closer to the time of the year where stock market seasonality becomes positive.