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Weekly S&P 500 #ChartStorm - 4 Mar 2018

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. VIX Futures Curve Indicator: First up is a look at the VXV vs VIX (i.e. 3-month VIX futures price vs the spot VIX). The reason this is a useful and interesting indicator is that when it undertakes extreme movements to the downside i.e. the VIX spikes beyond the futures price, it can present a kind of oversold or buying signal. This is because it basically implies that options traders are bidding up implied volatility i.e. they are more fearful vs futures traders. Of course with the benefit of hindsight, fear is sometimes rational and sometimes irrational.

Bottom line: The VXV vs VIX indicator remains in fear/oversold mode.

2. VIX Futures Curve Signal: The next one, from Tom McClellan, shows instances where spot VIX was trading above all VIX futures contracts, overlayed on the S&P500. So very much similar to the previous chart but setting the conditions against the entire VIX futures curve. It's interesting to note how each of these instances coincided with a short term market bottom. Albeit, the 2015/16 corrections show that the bottom in larger corrections can take some time to be found, even after the signal is triggered.

Bottom line: The VIX vs futures curve signal has lit up for the S&P500.

3. More on Volatility: Following on the topic of volatility, this chart presents an alternative view of realized volatility - taking the rolling annual count of days where the S&P500 moved by greater than 1% (up or down). After reaching a 50-year low early this year, this indicator has decisively turned up. But it's important to note how rising volatility - while often occurring during the start of a bear market - can sometimes be correlated with rising stocks. This is what I've referred to before as a more erratic bull market. Either way, it looks like we are entering a regime of generally higher volatility, particularly as the global central banks ease off on stimulus.

Bottom line: Realized volatility has reached a turning point.

4. Cross-Asset Implied Volatility: Back on the topic of implied volatility, this chart shows in the black the CBOE VIX, and in the red an average of implied volatility for the bond market, currencies, and commodities - basically a Cross Asset Implied Volatility Indicator. Two things standout on this one, first it reached an extreme low earlier this year, and like equity volatility has turned up since. Again I believe this will be another boat that will be tossed around by the turning tides of global monetary policy.

Bottom line: Cross asset implied volatility is starting to rise along with the VIX.

5. The Common Sense Indicator: Final one on the VIX - this interesting indicator has been termed "The Common Sense Indicator" by Kai Pflughaupt of Macro Technicals. It is simply the ratio of the S&P500 to the VIX, and importantly, is displayed against its long term trend, with standard deviations from trend indicated. This type of indicator will naturally trend over time because it is comparing a stationary and non-stationary series, but adding the deviation from trend aspect gets around this issue. The main point of interest is how it moved from an extreme sell signal to now a more neutral if not mild buy signal.

Bottom line: The Common Sense Indicator has moved back to neutral from extreme sell levels.

6. Forward PE vs Trend Channel: Another interesting use of trendlines is featured in this chart from Stock Board Asset, with the original chart from FactSet. It shows the forward PE ratio undertaking a significant correction down to the lower end of the trend channel - the implication being that it may rebound and go higher. In absolute levels it has more than unwound the increase from tax-cut-hype, albeit the impact of tax cuts have shown up in stronger forward earnings so the fall in the forward PE ratio has been more accentuated. Anyway you can't say it's cheap vs history at these levels, but it is certainly less expensive than it was.

Bottom line: The forward PE ratio has come down to the bottom end of its trend channel.

7. Earnings Growth: We've heard a lot about the surge in forward earnings thanks to the tax reforms, but it's important to note how strong trailing earnings growth has been, with the Q4 results up 22.6% YoY - a 7-year high. It's important to be very mindful of earnings trend when a market correction is underway. Market corrections are far more dangerous when earnings are declining or decelerating vs when earnings are on an improving path. You have to of course be forward looking, but even then the global and domestic economic backdrop look sound.

Bottom line: The pace of earnings growth is running at a 7-year high.

8. Buybacks are Back: This chart, shared by Lance Roberts, shows the annualized announced buybacks on the cards in 2018. While it is just an annualized figure, buybacks have been a key force in driving the market higher. So it's again important to be mindful of such trends. You might not agree that they are the best use of corporate funds (vs say capex or M&A or R&D), but it's still going to have an impact.

Bottom line: Indications are that 2018 could be a record year for corporate stock buybacks.