Weekly S&P 500 #ChartStorm - 8 Jan 2017

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. 200-day Moving Average Breadth: First up is a check-in on the market's level and breadth. Last week brought another new all time high for the S&P500, but what it didn't bring was a new high on market breadth. 200day moving average breadth (% of stocks in the index trading above their respective 200 day moving averages) has been making lower highs and lower lows against the index's higher highs and higher lows. We call this bearish divergence and it can be a warning sign of a correction. Bearish divergences can and do resolve without a major correction, but it is certainly a risk flag to keep in mind.

Bottom line: The S&P500 is seeing bearish divergence on 200 day moving average breadth.

2. Seasonality map: This is your seasonality map for 2017 for the S&P500 and VIX. It shows the average daily change in the S&P500 across the year over the period 1990-2016 and the average level by day of the VIX. On average after a slightly choppy start to the year you see a compression in the VIX and a rally in the S&P500 through much of the first half of the year, so if seasonality works you'd have a slight bullish bias (but remember it can be choppy at the start of the year). The caveat of course is that seasonality can and does break down at times.

Bottom line: The opening months of the year can still be choppy before the H1 positive seasonality kicks in.

Stock market seasonality and VIX seasonality

3. Mutual fund cash holdings: A number of factors influence mutual funds' holding of cash including liquidity management, interest rates, and of course the desire to add alpha by scaling up and down the cash level (higher in anticipation of a correction, lower to get maximum exposure in an up market). So when you see a chart showing the average cash holdings of US mutual funds dropping towards a 5 year low it makes you think the smart money is confident in the market. This may be well placed confidence, or a sign of an increasingly bullish or even overly bullish crowd - which can be a warning sign.

Bottom line: US mutual funds appear confident given lower than usual cash holdings.

4. Cross-asset fund flows: The below chart shows fund flows across asset classes since the US election and the key standout is US equities - there has been a tidal wave of flows following the election of Donald Trump as President of the United States of America. A lot of this stems around anticipation of tax cuts, infrastructure spending, and a more business friendly government (e.g. so far Trump's team has the most business experience of any previous president's team) and improved regulatory environment. Time will tell whether these expectations are met, but the stakes are increasingly high for Trump to deliver, and confidence has been roused.

Bottom line: There has been a tidal wave of flows into US equities following the election of Trump.

5. Wall Street strategists forecasts: I don't know many investors (hmm, not sure I know any actually) who rely on point-forecasts of stock indexes in their investment process, but still forecasting the market remains a popular past-time for Wall Street and a reliable talking point for the media. We should all know the folly of forecasting by now, and the overwhelming tendency for most if not all to get it wrong (and often spectacularly wrong), but the below chart is an interesting one. The chart from SentimenTrader posted in the Wall Street Journal shows the difference between the most optimistic and most pessimistic forecasts and interestingly enough the gap is the smallest on record - maybe these guys are spending too much time together! In any case, some will probably look at the chart and remark that 2007 was the last time it drove down to low levels, which was the peak of the previous cycle.

Bottom line: There is a record amount of "group think" in the 2017 round of Wall Street's market forecasts.

6. Price vs earnings: After a brief period of falling or at least sideways prices and falling earnings, there has been a surge in prices and what appears to be at least a stabilization in earnings. The chart shows the movement in the market and earnings across the past couple of decades. It's also a good reminder that we have actually just been through an earnings recession - but more on that in number 8.