Weekly S&P 500 #ChartStorm - 4 Dec 2016
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 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. Bearish divergence (RSI): The first chart, ominously, is a mild case of bearish divergence i.e. higher highs on price and lower highs on the RSI. Bearish divergences don't always work, but the idea behind it is that the market is going up without the same force or commitment. It does serve as a warning, and something to be mindful of for those concerned about the short-term gyrations. The other way of viewing it would be as a possible buying opportunity approaching if a correction does unfold.
Bottom line: Bearish divergence vs the RSI spotted on the weekly chart.
2. Bearish divergence (breadth): Bearish divergence has also been spotted vs 50-day moving average breadth. In this case what it represents is lower participation of the index, which can be a sign of problems in a group of companies or certain sectors. For example at the previous high, 50dma breadth rose to over 80%, while it capped out at 70% in the latest high. Divergences can resolve in a benign fashion, but it warrants noting as a potential warning flag for a short-term correction.
Bottom line: Bearish divergence spotted on the 50-day moving average breadth chart.
3. TRIN Overbought: The TRIN or TRading INdex is an indicator that combines advances and declines with trading volumes to producer an oscillator which shows if the market is oversold or overbought (i.e. when the indicator hits extremes). As with most oscillators for equities, oversold signals tend to work better than overbought signals. That all said, the TRIN recently hit overbought levels - as shown in the graph below from Willie Delwiche. Thus you could say the odds of a short-term selloff are elevated on this measure.
Bottom line: The TRIN reached overbought levels.
4. Tail risk hedgers: These two indexes track demand for/activity of tail risk hedging; specifically, the SKEW Index reflects demand for tail risk hedging in the options market, while the VVIX represents option pricing for options on the VIX (which could be interpreted as crash risk protection e.g. a call option on the VIX would provide protection in the event of a sudden market crash i.e. spike in the VIX Index). Anyway the point is both indexes have begun to stir; nothing like June pre-Brexit vote or in November around the election, but you can tell from this chart that at least some investors are beginning to grow wary.
Bottom line: Tail risk hedging activity is beginning to stir based on the SKEW and VVIX indexes.
5. ETF Flows: This graph shows daily fund flows for the major S&P500 ETF, SPY, before and after the US election. You can see prior to the election flows were erratic and predominantly negative, following the election there was major net inflows, but more recently it seems to have switched from the initial euphoria to more erratic ambivalence. All up since the election there's been over $7B of net inflows into the SPY ETF (which has AUM of just over $200B).
Bottom line: S&P500 ETF flows have gone from post-election euphoria to ambivalence.
6. Mutual Fund Flows: Looking instead at mutual fund flows, total equity flows have been mixed, but primarily negative, while total bond flows have drastically turned around to big net outflows - and this is likely just the beginning as the bond bust could have further to go. As to whether the bond bust casualty flows go to, it remains to be seen whether they might chase gains in equity land, but it is notable how mutual fund investors seem to be shunning equities this year.
Bottom line: Mutual fund flows show steady outflows from equities and a big turnaround in bond fund flows.
7. IPO Withdrawals: A curious thing happened in November; US IPO withdrawals spiked to the highest level since the financial crisis (note an IPO withdrawal is when a company files to IPO but then for whatever reason withdrawals or cancels/postpones). This probably reflects a degree of uncertainty around the election and the pain in some of the more frothy IPO dominant sectors like IT and biotech. Looking to the brief history, it seems when IPO withdrawals spike it often coincides with the bottom...
Bottom line: US IPO withdrawals have spiked.
8. Bollinger Band Width: This chart from Chris Ciovacco shows a monthly chart of the S&P500 against its Bollinger Band Width (which are essentially standard deviations). One thing we can tell from history is that periods of low volatility do not last, and periods of particularly low volatility often precede periods of higher volatility. And to make it interesting, often when you get volatility compressions for the S&P500 like the one we are seeing now (on this measure) you more often tend to see the *start* of a bull market.
Bottom line: Bolling Band Width has narrowed, a potentially bullish sign.
9. Number of analysts per $1B of market cap of the S&P500: This is one to file in the "interesting category". My guess is what's driving it is that the growth in analyst jobs is not keeping pace with the growth in the overall stock market capitalization. It is interesting though when you consider how regulation has really wrought havoc on the finance industry and destroyed many traditional jobs, only to replace them with compliance and admin personal to deal with the increasingly complex and onerous regulatory backdrop. But it reminds me of a term for the banking and finance industry called "the regulatory dialectic" which refers to the ebb and flow of regulation and deregulation based on political and economic cycles. As we've been through a period of re-regulation a mean reversionist might say we should be due for a period of de-regulation. Something to think about...
Bottom line: A "normalised" view shows the decline of analysts on wall street over the years.
10. Average tenure of an S&P500 company: Another one for the "interesting" category is the churn of S&P500 companies. HP projects that 75% of S&P500 companies will be removed from the index by 2027 (meaning they will either go bust or get replaced by new companies... or both). Composition is an important issue for stock indexes and for any market cap based index that has existed for at least a couple of decades you will likely see considerable drift in sector weights and composition (and even the emergence of new sectors). In short, the S&P500 you buy today (i.e. future/ETF) will not be the same 10 years from now... that could be a good thing, or a bad thing!
Bottom line: The average tenure of an S&P 500 company is declining, meaning a likely more rapid change in sector composition, among other things.
So where does all this leave us?
This week there's probably 3 themes:
1. Bearish signs
A couple of charts showed up with bearish signals this week, e.g. bearish divergence on the weekly chart against the RSI and against the 50-day moving average breadth. At the same time, the TRIN hit overbought levels, and we've also seen a slight turn up in tail risk hedging activity, and ETF flows have gone from post-election euphoria to more of an erratic ambivalence. So all up, there are a few short-term bearish signals for the market.
2. Bullish signs
On the bullish side, there's a couple of charts which could go either way e.g. the mutual fund flows chart shows consistent outflows from equity funds which could potentially come back at some point. Likewise the spike in IPO withdrawals can be seen as a negative thing, a potential harbinger of bad times ahead, but in the past it has often been a bullish sign. Finally, the compression of the Bollinger band width can often herald the start of a new bull market. So interesting signs on a medium term bullish case.
The third one is that of disruption; the analysts vs market cap chart likely reflects a degree of digital disruption (as databases and processing have become more advanced) as well as regulatory burden. But the other one, of S&P500 company tenure in the index also likely reflects technological disruption as much as economic cycles. They do go to highlight some important longer term trends that impact on the way we invest and what we invest in.
Overall there are a couple of short-term bearish warnings such as the bearish divergence displayed in the first two charts. But there are also a couple of medium term bullish looking charts. Overall I would say, from my assessment these are consistent, in that I think we could easily get a short-term correction, but view the medium term outlook as bullish overall. And to be fair, with a couple of near-term event risk landmines, we could see some "buying opportunities" pop up in the coming weeks.
See also: Weekly S&P500 #ChartStorm - 27 Nov 2016