Weekly S&P 500 #ChartStorm - 22 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. Weekly Price Chart: Quite a simple chart, but in my view a profound chart. I often like to put a simple chart that shows what the market is doing to add context, and the context this one provides or the profundity in it is how looking back over the past year you can see that much of the gains came from 3 distinct 3-4 week blocks (most will also point out how those blocks came after a dip or reset e.g. the election, Brexit, and the global panic at the start of the year). It goes to show how "boring" the market has been, often drifting sideways and doing nothing, and then bam! All at once. Those who go scared out of the market would have missed out.

Bottom line: Over the past year the market was either "on" or "off", and if you missed the "on" your returns would have been off!

2. Bearish breadth divergence: As I highlighted in previous editions of the Weekly S&P500 ChartStorm there has been some bearish breadth divergence developing on the S&P500. This time it's NDR showing it with a slightly different breadth measure, but the message is the same. In the past this type of pattern can be a bearish signal and a warning sign of a turning point in the market or at least a correction. Again it's something to keep in mind.

Bottom line: There remains bearish breadth divergence in the market, this could (eventually) resolve in the form of a correction or bear market.

3. When the S&P500 is within 1% of a 3-year high and financials are at a 1-month low: This chart from the always interesting and insightful SentimenTrader shows a very particular and almost dubious indicator. Some will immediately say, hang on - that smacks of data mining, what a specific and particular set of criteria! But if you think about it, what is the indicator trying to capture? It's basically saying when the market has gone up a lot (it must have to be near a 3-year high), but financials are starting to drop (financials are often a good leading indicator to what's going on in the economy and risk environment) that it's a potential warning sign. It seemed to work as a topping signal in 2000 and 2008, it could be just a coincidence, but something to think about - worth keeping an eye on those financials (as always).

Bottom line: Financials could be flagging big league risks for the S&P500.

4. Futures positioning: This chart shows hedge fund net positioning in S&P500 futures overlayed against the underlying benchmark index itself. The main takeaway from this one is that positioning has increased, but it's not really at extremes just yet, usually I would say that this is therefore a positive momentum signal. The way I usually think about these sort of indicators is that through the range they have "momentum information" (i.e. go with the flow) and then at extremes they have "contrarian information" (go against the crowd). So until it hits an extreme I would take a marginally bullish signal from this chart.

Bottom line: Hedge fund futures positioning is not yet at an extreme so the small rise in net-longs carry bullish momentum information.

5. An alternative measure of volatility: My own chart from Topdown Charts shows another view of volatility for the S&P500 i.e. a rolling 12 month count of daily price moves that exceeded + or - 1%. The indicator looks visually interesting and offers a couple of insights about market regimes. First, note how the indicator often spikes and peaks during a market bottom. Notice also how the indicator rolls over and goes lower during a "steady bull market". In both of those respects I would say it's currently signalling the start of a new, steady, bull market.

Bottom line: An alternative view of volatility seems to confirm the start of a new bull market.