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 vs China A-shares - biggest losers in the Trade War: First up this week is an interesting juxtaposition of the S&P500 and China A-shares. It's worth noting that the China A-shares ETF is not FX hedged, so it also includes the impact of changes in the exchange rate - which I think is a good thing because a fundamental deterioration in China would show up both in the equities and the currency, so it should serve as a decent indicator in that respect. Anyway, the reason for including it is this week brought further noise on the trade war or trade skirmish front, and if you look at this chart you might conclude that markets are telling us that China is the biggest loser here. The truth is no one really wins in a trade war, and to that end, maybe this is more of a warning chart than a pithy remark on headline grabbing issue.
Bottom line: It looks like markets are saying that China will be the biggest loser in the trade war.
2. Drivers of the S&P500: Similar line, this chart from Renaissance Macro shows their analysis of the approximate impact of various factors on the S&P500 this year. In short, earnings and US economic data are positive drivers, while it's basically all policy and politics that are holding the market back. Indeed, this is a time of heightened policy uncertainty, and increased activism/noise from Washington - as the next chart also shows...
Bottom line: Policy and politics are holding the market back.
3. Economic Noise Index: On the topic of policy uncertainty, this chart shows what I call the "Economic Noise Index" for America - which is the combination of the signal from the Economic Policy Uncertainty Index (a news based measure of policy uncertainty), and the Citi Economic Surprise Index (a measure of how economic data is turning out vs expectations). Basically, readings below zero indicate greater policy uncertainty and more downside surprises in the data - or "negative noise". Increased readings of negative noise are often found around selloffs and corrections - and indeed often precede them. So it's important then to note how the economic noise index has turned down recently; a possible warning sign for more market turmoil to come...
Bottom line: The economic noise in America is sound worse lately, and is a possible warning sign.
4. S&P500 vs Corporate Bonds: Somewhat related is the deterioration in market breadth in the corporate bond market, which appears to be displaying bearish divergence against the S&P500. Tom McClellan highlights how this is still the chart that worries him as high yield bonds tend to trade more like stocks than traditional bonds, and notably, keeping track of this market helped flag the deterioration in underlying conditions in the lead-up to the financial crisis and market crash. So this is not a chart to be taken lightly, particularly given the lukewarm response in corporate bonds to the rebound in stocks.
Bottom line: High yield bond market breadth is deteriorating, which could be a bad sign for stocks.
5. Corporate Credit Spread Seasonality: Sticking with high yield credit, this time looking at HY credit spreads, my own analysis shows how there tends to be a seasonal upward bias in credit spreads from around this time of the year through to October. This means going solely on this factor and nothing else you would expect an upward bias in credit spreads (which by the way mirrors what you see in the VIX - so now we are talking about credit risk pricing and equity risk pricing). You never invest on seasonality alone, but it is certainly a factor to keep in mind alongside variables such as valuation, cyclical indicators, and technicals. In this respect, it seems to build on the bearishness highlighted in the previous chart.
Bottom line: The historical seasonal tendency is for credit spreads to rise from around this time of the year.