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. Most Shorted Stocks vs the S&P500: First chart is a really interesting one, shared by Holger Zschaepitz of WELT, it shows the Thomson Reuters "Most Shorted Stocks Index" against the S&P500. The solid performance by the basket of most shorted stocks indicates that what we have seen is a substantial short-squeeze, where those heavily short are getting wrong footed and rushing to cover losing positions. One thing I would note is how relatively lackluster the performance of the S&P500 itself has been in the face of this short squeeze. So the question will be can momentum be sustained after the short-covering rally.
Bottom line: It looks like a big short-squeeze has been the thing driving markets higher.
2. Short Interest in SPY (S&P500 ETF): On a similar line, the next chart from Paban Pandey of Hedgopia shows the short interest for SPY (the largest S&P500 ETF by assets under management). Similar to the previous chart, it shows a heavy run-down in short interest through May, echoing the sentiment that this appears to be a short-covering rally. This one will be a key indicator to watch for if things lurch to the other side where a lack of shorts will indicate complacency, as we saw around the turn of the year.
Bottom line: Short interest was heavily run-down through May as a short-squeeze took hold.
3. S&P500 vs Investment Grade Credit Spreads: Looking under the surface of the market, some cracks are starting to appear. This chart shared by Jamie McGeever of Reuters shows US Investment Grade credit spreads inverted against the S&P500, and there appears to be some negative divergence here. The logic is that wider credit spreads reflect a tightening of financial conditions and potentially a reflection of deteriorating fundamentals. Of course it is worth noting that this divergence could easily close by credit spreads tightening instead and higher stock prices. Still it's a risk chart to be noted.
Bottom line: US IG credit spreads appear to be flagging downside risks.
4. S&P500 and the Fed "sweet spot indicator": On the topic of emerging risks, this graph shows what I call the Fed "sweet spot indicator" against the S&P500. The logic is that the sweet spot for markets is when wage growth is higher than the Fed funds rate. Historically this appears to be a useful market timing indicator, and the economic logic is sound: when wage growth is high and the Fed funds rate is low it provides the perfect mix of conditions to drive consumer spending and revenue growth, while also creating fuel for investing in the market (higher wages, and stocks more attractive relative to cash). Following the latest Fed rate hike to 2%, the monetary policy sweet spot indicator has contracted to the lowest point since prior to the crisis, albeit the indicator is still positive and has yet to invert, which is when from a risk perspective it becomes more meaningful.
Bottom line: The Fed is slowly exiting the sweet spot for markets.