Weekly S&P 500 #ChartStorm - 22 April 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. S&P500 Price Chart: First up is a look at a couple of key lines for the S&P500 price chart - the most notable is the downward sloping line as a series of lower highs have been registered. The second is the 200-day moving average, which so far has proven a "floor" to prices. The third, not shown, is the line which would show up around 2575, and if drawn would trigger most technical analysts to recognize a descending triangle pattern. The usefulness of triangle patterns like this are for setting clear lines in the sand to detect a breakout (in either direction). So keep an eye on these lines and levels in the days and weeks ahead.

Bottom line: Keep an eye on those lines in the sand.

2. The S&P500 vs Treasuries: This chart shows the S&P500 and IEF - a treasuries ETF. The point of showing it against this ETF is that it basically shows you the path of bond yields (inverted - since bond prices move inversely with bond yields). In late January/early February we saw the surge in bond yields coincide with the first major correction in a long time. What was more rare or notable was the fact that both bonds and stocks got sold-off. And for some it triggered memories of 1994, where a sustained and substantial selloff in bonds also made life difficult for stocks. And with the 10-year treasury yield on the verge of breaking out (my view is that it can definitely trade into the 3s, but will probably stop at about 3.5%), there's more to this chart than you might initially think.

Bottom line: Bonds are starting to selloff again, and they could take stocks with them.

3. S&P500 and China: Again using an ETF for another piece of "intermarket" analysis, this time ASHR - an ETF on China A Shares. It shows ASHR pulling away to the downside, and while there's no reason these two should trade in lock step, it is interesting given how important the Chinese economy is and of course given also the context of the trade skirmish or trade war. It pays to keep an eye on these type of intermarket charts because negative price action in pockets of the market which reflect broader macro themes can sometimes offer an early warning.

Bottom line: Chinese stocks are stumbling, and suggest short term downside risk.

4. Another Analog: Before saying anything on this, it's important to caution that analog charts have the possibility to deceive just as much as they have the possibility to add insight. And they can of course deceive without any trace of ill intent. Anyway, the chart shows the course of the market since Trump was elected, with the same plotted for JFK. The line of thinking is that there are some political parallels e.g. cold-war revival, etc. Personally I am skeptical, but the chart stood out as I went on my search for notable charts for the week!

Bottom line: The JFK-Trump stockmarket analog suggests caution.

5. Yield Curve: The flattening of the yield curve is getting attention once again, this time as the 10's minus 2's spread breaks below the 50bp mark. But as I noted in the latest weekly report, this is quite normal and very much to be expected as the business cycle matures. What's more, the chart below from Liz Ann Sonders shows that actually when the yield curve drops below 50bps the subsequent market action can actually be quite positive, and at the very least can be described as benign. There will come a time to worry about the maturing of the business cycle, but it doesn't seem to be the time just yet.

Bottom line: Don't worry (yet) about the yield curve flattening.

6.Earnings/Macro Pulse: Keeping on the topic of macro currents, the earnings revisions momentum indicator (combination of earnings revisions ratio and change in forward earnings), and "nominal surprise index" (combination of inflation + economic surprise indexes) both still look fairly decent. Certainly nothing like what it looked like in 2015/16 where the twin corrections at that time reflected genuine and well-founded concerns about the growth outlook. At this point the earnings/macro pulse is still solid, and thus underpins the outlook for stocks, at least on the economic cycle and earnings front.

Bottom line: The earnings/macro pulse still looks good.